Beat the Bank

1. Understand the Wealth Formula: Maximize Builders, Minimize Killers

The combined effects of these six forces can be captured in one simple formula, The Wealth Formula.

Wealth Builders: Amount, Time, and Rate of Return are the three primary forces that grow your wealth. The more you save, the longer you invest, and the higher your returns, the more your wealth will compound over time.

Wealth Killers: Fees, Taxes, and Inflation are the three main forces that erode your wealth. High fees can significantly reduce your returns over time, while taxes and inflation can eat away at your purchasing power.

To maximize your wealth:

• Increase your savings rate
• Start investing early and stay invested for the long-term
• Seek investments with attractive rates of return
• Minimize investment fees
• Utilize tax-advantaged accounts (e.g., TFSAs, RRSPs)
• Invest in assets that can potentially outpace inflation

2. Discover Your T-REX Score: Measure the True Impact of Fees

Your T-REX Score will tell you how efficiently the returns on your underlying investments translate into returns for you.

T-REX Score: The Total Return Efficiency Index Score measures the percentage of your investment returns you actually keep after fees. A higher T-REX Score means you're keeping more of your returns.

Calculate your score: Use the T-REX calculator at www.larrybates.ca to determine your score. Inputs include:

• Investment amount
• Projected average annual return before fees
• Annual fees
• Projected investment time horizon

Interpret your score:

• A score of 90% or higher is excellent
• Scores below 75% indicate you're losing too much to fees
• Many mutual funds have T-REX Scores of 50% or lower, meaning you're losing half your returns to fees

3. Beware of Old Bay Street Tactics: Sales Pitches Disguised as Advice

Old Bay Street loves to cite an 'independent' study (which was funded by... you guessed it, Bay Street) stating that Canadians with Old Bay Street 'advisors' have bigger investment portfolios and implying that if you hire an advisor your investment portfolio will increase substantially.

Understand the tactics: Old Bay Street firms use a four-step strategy to sell high-fee products:

1. The Pitch: Create fear and uncertainty about investing
2. The Plan: Offer a "free" financial plan
3. The Product: Recommend high-fee mutual funds and other complex products
4. The Prize: Collect substantial fees, often hidden or poorly disclosed

Be aware of misleading practices:

• Mutual fund star ratings that don't reflect absolute performance
• "Closet indexing" where high-fee funds simply mirror market indexes
• Complex products with hidden fees and risks
• Lack of transparency about the true impact of fees on long-term returns

4. Embrace New Bay Street: Low-Cost, Efficient Investment Options

New Bay Street provides low-cost access to the same wealth-generating investments, and is your pathway to Simply Successful Investing.

New Bay Street options:

1. Online discount brokers: Offer low-cost access to stocks, bonds, and ETFs
2. Robo-advisors: Provide automated, low-cost portfolio management
3. Fee-for-service advisors: Offer unbiased advice without selling products

Benefits of New Bay Street:

• Significantly lower fees compared to traditional mutual funds
• Greater transparency about costs and investment holdings
• Access to low-cost index ETFs that track market performance
• Ability to build diversified portfolios with minimal effort
• Potential for higher long-term returns due to lower fees

5. Master the Mindset: Think Long-Term and Ignore Market Noise

Rip Van Winkle would be the ideal investor. He'd invest before his nap, and when he woke up twenty years later, he'd be happy.

Develop a long-term perspective: Successful investing requires patience and discipline. Avoid the temptation to react to short-term market movements or chase hot investments.

Key mindset principles:

• Accept that market volatility is normal and inevitable
• Focus on your long-term goals rather than short-term performance
• Ignore daily market news and commentary
• Resist the urge to buy high and sell low based on emotions
• Understand that time in the market is more important than timing the market

Implement "Clockwork Investing": Make regular investments on a set schedule, regardless of market conditions. This approach helps you avoid emotional decision-making and takes advantage of dollar-cost averaging.

6. Implement Simply Successful Investing: DIY, AIY, or Robo-Advisor

Simply Successful Investing will give you an excellent probability of significantly increasing, and in most cases doubling, your long-term investment returns compared to the average Canadian mutual fund investor.

Choose your approach:

1. Do-It-Yourself (DIY): Select and manage individual stocks and bonds
2. Assemble-It-Yourself (AIY): Build a portfolio of low-cost index ETFs
3. Robo-Advisor: Use an automated service to manage your investments

AIY investing steps:

1. Determine your desired stock/bond allocation
2. Choose 2-3 low-cost index ETFs (e.g., Canadian, US, and international stocks)
3. Open an account with an online discount broker
4. Purchase ETFs according to your allocation
5. Rebalance annually to maintain your desired allocation

Benefits of Simply Successful Investing:

• Significantly lower fees compared to traditional mutual funds
• Potential to double long-term returns for many investors
• Simple and easy to implement, requiring minimal time and effort
• Greater control and transparency over your investments

7. Create a Simple Financial Plan: Save, Invest, and Stay the Course

Begin with the end in mind.

Develop your plan:

1. Estimate your retirement income needs (70% of working income is a common rule of thumb)
2. Calculate your required nest egg using tools like the "Rule of 20"
3. Determine your annual savings target to reach your goal
4. Choose your investment approach (DIY, AIY, or Robo-Advisor)
5. Implement your plan and review annually

Key planning principles:

• Start saving and investing as early as possible
• Automate your savings to ensure consistency
• Utilize tax-advantaged accounts like TFSAs and RRSPs
• Maintain a diversified portfolio aligned with your risk tolerance
• Stay the course through market ups and downs
• Adjust your plan as needed based on life changes or goals

Remember: A simple plan that you stick to is better than a complex plan that you abandon. Focus on the fundamentals of saving regularly, investing wisely, and staying committed to your long-term goals.

Last updated: November 3, 2024