Save Early, Save Often
Susan Dziubinski, Director of Content, Morningstar.com
In my job interview at Morningstar in 1991, I was asked what a mutual fund was. I didn’t know—I’d been an English major! Thankfully, I was hired anyway, but I had a lot to learn. Almost thirty years later, what’s the most important lesson I’ve learned about investing? That’s easy: Save early and often.
Morningstar has always offered employees access to a retirement plan and still wet behind my ears and decades from retirement, I diligently tucked away as much as I could each pay cheque – after all, my manager said that was the smart thing to do. She said that I should let compounding work for me.
Sure, I made some questionable investment decisions back then (a little too much enthusiasm for emerging markets, for instance.) but I was saving rather than spending, no matter what was going on in the markets. Saving became a habit; I didn’t even think about it. Nearly thirty years later, that habit has given my family some financial peace of mind: our house is paid for, our three kids will be able to go to university, and my husband and I can retire someday if we so choose.
Let compounding work for you, too.
Successful Investing is a Long Game
Paul D. Kaplan, Director of Research, Morningstar Canada
I started my career in investment research in 1988 when I joined a small firm called Ibbotson Associates in Chicago. Ibbotson was best known for its annual publication, the Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook, which presented the monthly performance of major US asset classes with data going back to January 1926. The book contained a chart, which was also available as a poster, that showed how one dollar invested on December 31, 1925 in stocks, bonds, and cash would have grown if continually reinvested. The chart also showed that along the way, there were market crashes and recoveries - it's an exercise I have repeated recently, to show that the pain and rewards of equity investing have continued.
The lesson I learned from that chart, is as important now than it was 32 years ago: successful investing is a long game. Over the long run, equity markets have greatly rewarded those with patience and nerves of steel. But you have to able to stomach the losses along way.
One caveat: there is no guarantee that markets will behave in the future as they’ve done in the past. But I think that it is still a good bet that they will.
Home Country Bias and Diversification
Robert Miehm, Associate Portfolio Manager, MIM Canada
When I first started investing, I preferred to stick close to home, purchasing domestic equities and perhaps bonds, wether it was using stocks, funds or ETFs. Many individual investors just starting out are likely to hold to this view, given the comfort of investing close to home, in companies that you know. But as your knowledge grows you learn that diversifying globally, will get your portfolio more diversified and should increase your portfolio risk adjusted returns.
My home market of Canada, for example, represents only about 2.8% of the global equity investment opportunity set, as measured using the MSCI ACWI IMI Index. That means if you are only investing in Canadian equities, you are missing out on a number of options that can benefit your portfolio.
In constructing your portfolio, you should try to choose a broad array of global asset classes and investments that have returns that are not highly correlated. In doing so you should be able to reduce overall portfolio volatility while at the same time increasing your risk adjusted returns.
Avoid Bubbles, Not Risk
James Gard, Content Editor, Morningstar UK
I bought a hotly tipped tech fund during the dotcom boom in 2000. This was my first proper investment and, as I worked for a dotcom company at the time, I had fully bought in to the tech mania. When the fund blew up and the dotcom bubble burst, I vowed never to make the same mistake again. In reality, I had lost around £300 but this was tough to bear psychologically as I had made a mistake on my first outing as investor.
From then on, I avoided anything that looked like a bubble – the UK housing market, gold, Bitcoin – which probably saved me some sleepless nights over the years, but also lost me some opportunities to make money. Even though I was an early adopter of tech services such as Spotify and Amazon (my first order was in 1999!), I convinced myself that I wouldn’t fall for the hype again.
There are two lessons here: an avoid-risk-at-all-costs mentality means I’ve missed out on some serious returns in the last few years. And the other is that some market narratives take a long time to play out: it seems the promises made by dotcom entrepreneurs in 2000 have actually come to pass, it’s just a different set of companies that have benefited.
Don’t Mess with Your Portfolio!
Ian Tam, Director of Investment Research, Morningstar Canada
Over the years I’ve noticed a common trait among successful investors: discipline. Having discipline in investing is one of the hardest things to do – and with good reason, there is a very strong emotional tie with money and what it represents. Although it’s true that money can’t buy happiness directly, it does grant us the ability to cover our basic needs.
When I began investing for myself, I was glued to my trading account, obsessing over every percentage point gained or lost, thinking “what if this happens", often trading stocks for no other reason than “it went up” or “it went down” within the day. I also remember using stop loss orders if a stock fell by more than 10% in the day, only to find it recover much of its value the following day. Looking back objectively, all of this meticulous monitoring really didn’t amount to much of anything except trading costs.
The reality, I’ve since learned, is that over the short term there was no way that I could have produced any meaningful results carrying on this way, and really it was just a waste of energy. Short-term moves in stock price are driven by hundreds of thousands of market participants. Some, like me, were probably foolishly doing the same thing. Those that mattered were professional managers who had the assets to move the market, powered by an army of skilled analysts processing information that I didn’t even know to look at. Not to mention the trade execution algorithms crafted by the industry’s brightest minds and designed to take advantage of every tick of data at the frequency of a micro-second.
Looking back, a better approach would have been to do nothing. Looking at my portfolio every day made it difficult for me to detach emotionally from the short term moves in the market. Lesson? Looking less is actually helpful.
Don’t Just Copy the “Experts”
Holly Black, Editorial Manager, EMEA, Morningstar
When I first started investing, I didn’t feel all that confident picking funds for my portfolio, so I asked “more knowledgeable” people where they were investing and copied some of their choices. This meant that for several years I had a portfolio that didn’t make a lot of sense. There was overlap between the funds and some of their strategies didn’t really line up with my own goals or beliefs.
Over time I’ve grown more confident, and these days I only put my money into something if I truly believe it will outperform over the long-term. And rather than taking tips and trusting that others know best, I make decisions for myself – at least that way if it goes wrong, I only have myself to blame. And it’s also much more satisfying when it goes right!
Michael Pe, Product Manager, Morningstar CPMS
My top investment lesson learnt is to start investing as early as possible. When I started my career, it took me years before getting comfortable with investing the stock market. I wanted to educate myself before investing my hard-earned savings. But if I had just started investing five years earlier, my predicted future portfolio value at retirement would be significantly higher than it is now.
Let’s take an example of Person A, 30 years old starting to save and invest £300 a month until they retire at 60. Assuming an 8% annual return (the average return on the S&P/TSX Composite for the last 40 years), they would roughly have £447,000 in their portfolio at age 60.
Person B, meanwhile, did the same thing as Person A, but started investing five years earlier at age 25. At £300 a month, that would amount to an additional £18,000 being invested, and giving Person B £688,000 at retirement. That is a difference of over £241,000 for investing five years earlier!
So, try to invest as early as possible as that can make a bigger difference than you realise!
Good Investing is Boring
David Blanchett, Head of Retirement Research, Morningstar Investment Management
Good investing is pretty boring, is what I've learned. People often assume the best investors, and the best way to invest, is flashy. While that can work for some people, for the vast majority of investors a relatively boring strategy, which involves a well-diversified portfolio of high quality funds, is probably a smart strategy.
Don’t Look for Alchemy!
Christine Benz, Director of Personal Finance, Morningstar
Investors are often all too receptive to the notion that they can reach their goals without significant sacrifice; that their investment portfolio can work their magic. Investment selection does matter, but luck invariably plays a crucial role in financial success, too, even though a lot of the lucky ones among us don't like to admit it. But don't underrate the mundane financial jobs - the no-fun, super-unsexy financial equivalents of eating lots of fruits and vegetables and logging 10,000 steps a day.
Christine’s Pro-Tips to Get Rich Slow:
- Maintain appropriate saving and spending rates
- Nurture human capital and stay employed
- Maintain good credit scores
- Stick with a sane asset allocation mix, and
- Purchase appropriate insurance products
Do a passingly decent job with them over many years and it's a near-certainty the rest of your financial life will fall into place.