Nobody enjoys losing, failing, or making mistakes but they are an inevitable part of the learning process. The real key is to learn from your mistakes, adjust your approach, and improve so you don’t repeat the same errors. Along the way, you’ll meet new challenges and make bigger mistakes, but the goal is to grow and not repeat past blunders.
Losing sucks! But it’s a critical part of learning. Making mistakes can be so difficult that we avoid vulnerable situations or transfer responsibility of others.
You are responsible for your life! In personal finance, there are plenty of ways to lose. I’ll share a few in this post and how cutting away your losses can bring you joy.
Losses in Fees
The first loss, which could also be the biggest, is losses through fees. Fees are the toughest to spot because they are invisible. You don’t actually pay them out of your own pocket. Fees are discreetly taken from you. They are embedded in your return, whether it’s gains or losses. Ovetime these fees will erode a significant portion of your retirement nest egg. Don’t let fees do this!
You can find out how much you are paying in fees by looking at the Management Expense Ratio (MER). Simply Google the name of your fund and find the MER on the fund profile or overview page. You want this number to be under 0.2%, also known as 20 basis points.
Below is an example of two different funds. The one on the left is offered through Canada Life and has a MER of 2.49% or 249 basis points. The fund on the right from Vanguard has a MER of 0.05% or 5 basis points. The Canada Life fund is 50 times more expensive to own. That’s insane!
A few months ago, I moved my last remaining investments that I had with my financial advisor. The funds were in a high fee mutual fund in a Registered Education Savings Plan (RESP). This money is for my kids to help them with postsecondary education if they choose to go that route.
The fund had a 2.4% MER and had done well over the last decade because it was in American Equity stocks. When the fund was small, the 2.4% didn’t bother me that much. Actually, I didn’t even realize what a big deal a 2.4% MER was until I started learning about personal finance. But as the fund grew, that 2.4% ate away at my childrens’ educational future. I decided enough was enough. I wrote my advisor to let them know I would be transferring my RESP to my on line brokerage account.
It wasn’t that hard to do and when the funds arrived in my brokerage account, I felt the joy of cutting my losses.
Unfortunately, fees aren’t the only losses in my portfolio.
Bad Investments
There’s no such thing as a golfer who’s never lost a golf ball. Them same holds true for investors. I’ve lost a lot of money…I mean golf balls. Actually, it’s both.
I recently cut losses out of my investment portfolio and it feels amazing!
Sometimes you might be so bad at picking stocks that your investmens fall to zero. I have a gift of being able to choose stocks that become delisted. I should have done what George Costanza did in Seinfeld and do the opposite of what my instincts were telling me.
I had dead stocks in my account that I couldn’t sell. The shares were worthless. Their value had plummeted 100% in value. They seared a big red loss on my balance sheet. I couldn’t sell them because the companies were terrible and were delisted.
Every time I logged on to my brokerage account there they were. Blemishes. that’s too nice of a word. Scars. Scars of the painful injury of trying to pick individual stocks and thinking I was smart. It’s a constant reminder of how terrible of an investor I am. To get them off my account, I had to gift them to my brokerage company so they would disappear.
When you have stock that is near worthless, you think, ah man, I should have sold this when it was down……(insert percentage here).
It’s human nature to dwell on mistakes. In investing, as the saying goes, a dollar lost feels twice as bad as a dollar gained. Losses hurt!
Knowing what you know now, would you still invest in this stock, Thematic ETF, etc?
You think that the stock might roar back to life. This is wishful thinking. Cut it out of your life and move on.
Would you buy 10 000 shares of that penny stock at 3 cents a share today? If that answer is no, sell it! Move on. You learned your lesson, albeit an expensive one.
Your crappy stock golf ball has been living in a pond for years and it’s not coming back to life, and it isn’t going to help you build the life you want. Forget about the ball, remember the lesson. You can’t pick individual stocks!
Another way to look at losses on your balance sheet is to think of them like junk that sits around your house. When your home is cluttered, it’s hard to think clearly. The same holds true for investing. The more clutter in your investment account, the harder it is to do your best investing.
Give them away! It feels so good to get those losses off your balance sheet. When all you have left is one or index funds in your account, the future looks promising.
Take Aways
Don t’ feel bad about your losses. Actually, you should feel bad but be grateful that you had them. We all have to pay our tuition and learning usually costs money. Now that I’ve learned that I’m a horrible stock picker, index funds are for me the way to go.
Keep your investments simple. Stick to low cost broad market ETFs and never sell. It’s okay if you made the mistake but it’s not okay if you continue to make the same mistake.
Decrease the clutter in your investment accounts, cut your losses, and enjoy the simplicity and effectiveness that index ETFs provide.