My No. 1 Money Lessons

Save Early, Save Often By 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 30 years later, what’s the most important lesson I’ve learned about investing? That’s easy: Save early and often. Even back in the early 1990s, Morningstar offered employees access to a retirement plan. Still wet behind my ears and decades from retirement, I diligently tucked away as many dollars as I could each paycheck--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 allocation decisions back then. (A little too much enthusiasm for emerging markets, for instance.) Yet I was saving rather than spending--and I was doing so every two weeks, no matter what was going on in the markets. Saving became a habit; I didn’t even think about it. Nearly 30 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 college. And my husband and I can retire someday if we so choose. Let compounding work for you, too. Don’t Look for Alchemy! By Christine Benz, Director of Personal Finance, Morningstar Not so long ago, a friend of a friend recently shared that his advisor had diagnosed his portfolio as being too light on small caps and in need of an annuity. My recommendations were a lot more mundane: I thought he needed to step up his savings rate and build more of an emergency cash cushion. Of course, his advisor may have communicated some of those same ideas, too, but my friend tuned out the advice--after all, watching your money grow on its own is a lot more fun than reducing spending. Investors are all too receptive to the notion that they can reach their goals without significant sacrifice; their investment portfolios 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: 1. Maintain appropriate saving and spending rates 2. Nurture human capital and stay employed 3. Maintain good credit scores 4. Stick with a sane asset-allocation mix, and 5. 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. Invest for the Long Term By Dan Kemp, Chief Investment Officer--EMEA, Morningstar Investment Management Learning to invest is unlike other types of learning, as experience frequently teaches the wrong lessons due to the randomness of short-term price movements. For example, a person may “learn” that buying shares in companies with good growth prospects delivers higher than average returns, only to subsequently discover that is not always the case. The weakness of the feedback loop when learning to invest makes it difficult to distinguish “wisdom” from “noise.” It is only as we observe asset prices over the longer term and see the gravity of value acting on share prices that we can derive some meaningful lessons about investing. It is for this reason that the most important lesson I’ve learnt is to adopt a long-term approach. Rather than worrying about what the next few days, weeks, or months will bring, I try to think in terms of years. Over this time period, I can be more confident that the price of an asset will reflect its fair value and reward the hard work required to estimate that fair value. However, this is not a lesson that can be learned once but instead is an abiding commitment that is constantly tested in an investing environment that seems designed to encourage a short-term approach. Successful Investing Is a Long Game By 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. The yearbook presented the monthly performance of major U.S. asset classes with data going back to January 1926. The book contained a chart, which was also available as a poster, that showed how $1 invested on Dec. 31, 1925, in stocks, bonds, and cash would have grown if continually reinvested. The stock indexes grew to many fold times the value of the bond and cash indexes. But the chart also showed that along the way, there were market crashes and recoveries. Recently, I have created updated and extended growth charts for both the U.S. and Canadian stock markets. These charts show that both the pain and rewards of equity investing have continued. The lesson that I learned from that chart is as important now as (if not more important than) it was 32 years ago: Successful investing is a long game. Over the long run, the equity markets have greatly rewarded those with patience and nerves of steel. (You may even want to buy in falling markets and sell in rising markets to maintain your level of risk as part of an asset-allocation strategy that includes bonds and cash.) 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 By Robert Miehm, Associate Portfolio Manager, MIM Canada When I first started investing in high school, I preferred to stick close to home, purchasing domestic equities and perhaps bonds, typically using a variety of investment products including stocks, mutual funds, and eventually exchange-traded funds as they established more of a presence. 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’ll learn that diversifying globally, especially into regions where asset-class valuations are more appealing, will get your portfolio more diversified and should increase your portfolio’s risk-adjusted returns. Canada represents only about 2.8% of the global equity investment opportunity set, as measured using the MSCI ACWI IMI Index, so 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 increase your risk-adjusted returns. Don’t Mess With Your Portfolio! By Ian Tam, Director of Investment Research, Morningstar Canada Over the years, I’ve talked to many portfolio managers and investment advisors and I’ve noticed a common trait of those that are successful: 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 (according to Maslow’s Hierarchy, the bottom two layers). For this reason, 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 and trading really didn’t amount to much of anything except the commissions I paid to my discount brokerage. 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 (I know because I’ve since met them) and designed to take advantage of every tick of data at the frequency of a micro-second. Knowing all of this now, what hope did I have hitting “sell” if I saw something turn red? Looking back, a better approach would have been to follow the iconic words of Ron Popeil:

Set It and Forget It ... to the extent that 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 often is actually helpful. Don't Just Copy the "Experts" By 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! Start NOW! By Michael Pe, Product Manager, Morningstar CPMS My number-one 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 in the stock market. I wanted to educate myself before investing my hard-earned savings. However, I realized later that those few years cost me immensely. If I had started investing five years earlier, my predicted future portfolio value at retirement would have been significantly higher than it is now.

For example, let's take an example of Person A, 30 years of age, starting to save and invest $300 a month until retirement at the age of 60. Assuming an 8% annual return (the average return on the S&P/TSX Composite for the last 40 years), there would be roughly $447,000 in the portfolio at age 60. Now let's consider Person B, who 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 versus Person A. However, Person B would have $688,000 at retirement instead of $447,000 like Person A. That is a difference of over $241,000 for starting investing five years earlier! So, try to invest as early as possible as that can make a bigger difference than you realize! Have a Plan By Dan Shkolnik, Director, Morningstar CPMS Sales I would have to say the main investment lesson I have learned over the years would have to be: Have a plan! If you have a plan before you enter a trade or a position, you are taking control of that decision by spelling out why you're doing what you're doing. This removes emotions from the process. Similarly, your plan must also include reasons for exiting your position and/or clear reasons that would prove your thesis is wrong. It is important to have this in place prior to acting because it allows you to be objective about the actions you are going to make. Plan your trade, trade your plan! Taxes Matter By Cynthia Pekron, Director of Quantitative Research, Morningstar One of the most important lessons I've learned while working at Morningstar is that, while unglamorous, taxes matter. I studied some finance and investing in college but did not learn much about how to manage taxes. Trust me, this is an area where a professional can certainly help. Even without an advisor's advice, it's worth looking into the different types of tax-efficient investment vehicles you can use and what benefits they may offer. Being tax-conscious has made me more confident in my retirement planning and has offered us advantages of tax-sheltering (not being taxed on the gains in a special type of account) to cover health-related expenses. It's incredible what a big impact seemingly small changes to your investing approach can have! Good Investing Is Boring By David Blanchett, Head of Retirement Research, Morningstar Investment Management Good investing is pretty boring. People often assume the best investors, and the best way to invest, are flashy. While that can work for some people, for the vast majority of investors, a relatively boring strategy that involves a well-diversified portfolio of high-quality funds is probably a smart strategy.