Mind the Gap: This simple trick could increase your return by 1.7%!

Investment planning for retirees.

Investment Planning Saskatchewan

If I was to give you one simple piece of advice that could increase the total return of your investments by 1.7%, would you hear me out?

Think about it.

If you have $500,000 to invest for the next 30 years and we compounded your money by 1.7% per year during that time frame, your portfolio would be nearly $830,000!!

A massive $330,000 potential increase to your retirement assets by doing this one thing.

So how can you achieve these results? Although the answer is simple, the implementation of this strategy is anything but.

So what is it....


An annual report completed by Morningstar (An independent research and ratings website for investors) concluded that U.S investors total return fell short of their underlying investments actual return during the same period.

Here is an excerpt from the report.

Our annual study of dollar-weighted returns (also known as investor returns) finds investors earned about 7.7% per year on the average dollar they invested in mutual funds and ETFs over the 10 years ended Dec. 31, 2020.
This is about 1.7 percentage points less than the total returns their fund investments generated over the same period.
This shortfall, or gap, stems from inopportunely timed purchases and sales of fund shares, which cost investors nearly one sixth the return they would have earned if they had simply bought and held. Source: © 2021 Morningstar

Now, even though this report was completed using U.S investor data, a very similar result would be true for Canadian investors.

So how does this relate to the real world decisions we make?

Let's take March 2020 for example. During this time markets fell drastically in a short period of time leaving many investors wondering what to do next.

Stay the course? Sell to cash? Rebalance? Stop withdrawals and eat cat food?

As the research suggests - when in doubt - do nothing. Followed closely by rebalancing your investments (Depending on your risk tolerance!) We will chat more about rebalancing in another post.

Now, if you're one of the smart ones that has a retirement plan that factors in global pandemics (Yes, Financial Planners really do plan for the worst), then you probably didn't feel financial pressure during 2020.

If you don't have a retirement plan - it may be time to complete an assessment to see if your retirement accounts can withstand another bout of volatility.

Not ready to complete an assessment?

No worries

Here are a few other lessons we can learn from the Morningstar report that will help ensure you make smart choices with your money.

  • Automate mundane tasks, such as setting asset-allocation targets and periodically rebalancing: If you are a DIY investor, be sure to check these boxes; proper asset allocation and a consistent rebalancing schedule. If you work with an advisor, the same advice applies.

However, I would add that your advisor should be proactively contacting you during volatility. Behavior Coaching is a big reason why you are paying your advisor in the first place.

  • Focus on holding a small number of widely diversified funds: As the financial industry has grown, so has the investment options available to Canadian investors.

Funds holding a specific industry sector, highly specialized small cap or exempt market holdings (Car wash fund.... yikes), Provincially concentrated labour sponsored funds, leveraged factor portfolios, and single-country funds are just a few examples.

The simple fact is that investors have fared far better by keeping things simple and sticking with plain-vanilla, broadly diversified funds.

  • Embrace techniques that put investment decisions on autopilot, such as dollar-cost averaging (DCA) or systematic withdrawals for retirees: For retirees, the importance of consistent investing and/or steady withdrawals will help to reduce the potential "timing the market" issue this study is revolving around.

Now, when it comes to investing, DCA may cause return drag on your portfolio. So if you have the means, do the lump sum today instead of tomorrow.

I think the key take away is to remove the guess work from your investment decisions. Having an investment plan will free up your time, reduce stress and have a positive impact on your returns. It also helps investors mitigate the irrational and emotional decisions that erode wealth.

For retirement investors, the importance of having an action plan during market volatility could be the difference between outliving your money or your money outliving you.

A properly structured retirement plan will help you formalize an investment mandate, understand the impact market volatility will have on your retirement income and give you peace of mind.

Written and published by Michael Isbister, IG Private Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.


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