50 Shades Of Busy: A Simple Plan To Rock Investing For Women On The Go

I bet I know the first thing out your mouth these days when asked how you’re doing:

“Life is busy!”

You’re not kidding. Between work deadlines, the kids’ extra-curricular activities for which you are chief chauffeur, errands, meal planning, the six loads of laundry that never seem to get done, walking the dog, and the ten minutes you have to exercise, you’re juggling so many balls you can’t even see the sun most days.

On top of all that, you have your finances. Then you read a blog post by someone like me who points out that women have a tiny fraction of the wealth that men have – in part, because we don’t invest enough, which in turn makes us more vulnerable - and you think, “What? You want me to learn how to invest in addition to everything else? For sure, I’ll get right on that in my free time.”

Learn to invest goes on your to-do list. OK, probably not.

If you’re like most women, you do not have a ton of confidence about money in general and especially about investing.

It’s scary. You could lose money. Isn’t investing akin to gambling? You feel that you need to be an expert before even thinking about it.

Research tells us that women typically do one of two things when it comes to investing:

1. They delegate responsibility for this area of their finances to their spouse or an advisor. They usually can’t tell you which investments they hold, what they’re paying in fees, or how they’re doing (i.e. their return on investment).
2. They stick to very conservative, so-called safe investments like GICs for the bulk of their money, even though GICs typically don’t keep pace with inflation. The result is the erosion of the buying power of their money. Sure, the principal is guaranteed, but its value has diminished because the cost of everything has gone up.

Five years ago, the research nerd in me wanted to understand the system. After building a portfolio of investment properties, I wanted to know why so many people, myself included, fared so badly in the stock market.

What I found surprised me. Good news, ladies: To do well with investments in the stock market, you need to keep it simple and let the market work for you!

Here’s a quick overview of the key factors:

Stock Picking

The idea behind selecting individual companies in which to invest is that you or the fund manager can spot the winners and the deals. In the latter case, I’m referring to undervalued companies that provide strong returns when the market catches up and figures out how terrific they are.

There’s just one problem with this approach: Unless you have a crystal ball, it turns out that stock-picking is a mug’s game. Here is an example taken from The Millionaire Teacher, a simple-to-read book by Andrew Hallam outlining some of the research:

Professors Laurent Barras, Olivier Scaillet and Russell Wermers studied the performance of 2,076 professional mutual fund manager over a thirty-two-year period. They found that “99.4% of fund managers displayed no evidence of genuine stock picking skill, and the 0.6% of managers who did outperform the index were statistically indistinguishable from zero.”

A portfolio manager and Certified Financial Analyst whom I interviewed put it this way: “Less than 4% of people beat the market. The problem is that 80% think they’re part of the 4% who can do it.”

In other words, if you think you or high-powered mutual fund managers are going to generate better results than low-cost index funds that simply track the market, thereby avoiding the many costs associated with constant buying and selling, you’re likely to be disappointed. The odds are stacked against you.

A long line of Nobel Prize-winning economists has presented arguments against active investing - picking stocks and trying to determine the right time to buy or sell. Throw in investing luminaries like Warren Buffett and Jack Bogle, and you’ve got an impressive list of people who argue that the market is efficient. As they say, you don’t beat the market; the market beats you.

Forget stock-picking and market timing; here’s what we should be paying attention to instead: asset allocation.

“Since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control.” – William Bernstein, The Four Pillars of Investing.

Focus on determining the right mix of stocks (higher risk but higher historical returns) and bonds (lower risk but lower historical returns) that makes sense for you based on your risk tolerance, years left to invest, and your goals. Then, diversify across different markets – Canada, the US, and international markets.

The upshot: Passive investing (i.e. using index funds or index ETFs) is a much more effective strategy than active investing. As Andrew Hallam says, “With training, the average 5th grader can take on Wall Street using index funds.”

Fees

Is 2% a lot to pay in fees for investments? When I asked this question to the seventy-eight women I interviewed last year, nearly all of them said that it wasn’t a big deal; it wouldn’t amount to much.

At a recent Women’s Money Group meeting in which I looked at the factors that affect your returns, I did a bit of math for the ladies. It turns out that small numbers can have a massive impact on your results.

“If you think you are too small to make a difference, try sleeping with a mosquito.” – Dalai Lama.

When a fund has a 2% MER (Management Expense Ratio - the fee to run the fund), it doesn’t sound like a big deal and it isn’t for the first year. Or the second. But then compound interest kicks in over time and packs a big punch. Taking 2% of your investments out year after year can mean tens or hundreds of thousands of dollars out of your retirement fund. Now that’s a big problem.

The upshot: Mercilessly cut fees wherever you can.

The Busy Woman’s Plan

This is all great news for busy people. Research doesn’t just back a simple plan, it flat-out demonstrates that it’s the smartest approach.

Here’s how to rock investing in four steps:

1. Determine your asset allocation based on your plan. For three easy-to-implement options, look at the Canadian Couch Potato’s Model Portfolios. They range from a hands-off approach using a single index fund, to a more hands-on portfolio with ETFs.
2. Rebalance once a year to maintain your desired asset mix. Or, if you prefer, use funds that rebalance for you. Vanguard just came out with three great, low-fee options: VBAL, VCNS, and VGRO.
3. Stick to your plan. Ignore talking heads, the news, and Bob in the corner cubicle.
4. You did it! Pour yourself a glass of wine.

Thankfully, building wealth through investing isn’t rocket science. You don’t need to be a math star or an expert. Just listen to the research and keep it simple.

Doris Belland, Your Financial Launchpad, Author of “Protect Your Purse, Shared Lessons for Women”.