Three Real-World Investment Cases & What We Can Learn From Them
Understanding financial theory is one thing. Applying it in real life – especially when emotions are involved – is something else entirely.
In this article, I’m walking through three real-world investment scenarios that highlight common challenges Canadian professionals face, especially around market timing, switching to lower-cost investments, and the temptation of hot investment ideas. These cases aren’t uncommon, and you may see yourself in one of them.
Case 1: Sitting on Cash During Market Uncertainty
A mid-career incorporated professional has done a lot of things right. They’ve saved over $1M between their corporation and personal accounts, they have a solid income, and they’ve adopted an index investing strategy. But now they’re worried.
Talk of an upcoming recession is everywhere. They’re nervous about staying invested, and they’ve been sitting on a growing pile of corporate cash that they haven’t yet put into the market.
What should they do?
This is a common scenario. The truth is that, by the time you’re hearing about economic news in the media, it’s already priced into the market. Markets are forward-looking – they don’t respond to the news itself, but to whether the news is better or worse than expected.
Take the 2008 financial crisis: the market started dropping in October 2007, months before a recession was officially declared. And it began to recover in early 2009 – while bad economic news was still dominating the headlines.
So waiting for “clarity” often means missing the recovery.
Especially nowadays – the news cycle and markets move FAST. Thinking that they will wait for you to be comfortable is laughable. Always remember that the ultimate reason that we get compensated (returns) is for the “risk” we take in the market.
As for that corporate cash? There are two primary approaches:
- Lump sum investing: statistically optimal most of the time.
- Dollar-cost averaging (DCA): investing gradually over several months.
While lump sum investing is likely to generate higher returns over time (66% of the time, approximately), dollar-cost averaging can help people feel more comfortable with the process. It smooths the emotional experience of putting a large amount of money to work and can be the right choice if fear of regret is holding someone back.
That said, if you feel the need to DCA heavily, it may also be a signal that your overall portfolio is too aggressive.
The bottom line? If the money is earmarked for long-term investing, get it working. Sitting in cash during long stretches of market growth is a bigger risk to your total net worth than most people think.
Fun Fact/Question: If I told you the exact day of when a recession is going to occur, what would you do with your money?
- The obvious answer that most give is that they would sell before it happened.
- Did you know that between 1957 and 2020, the TSX had positive returns during 4 of the 7 recessions? And in 2 of the 3 that were negative, the S&P500 had positive returns? Many times the market “sniffs out” the recession before it happens, and has already bottomed close to 6 months in advance. This aligns with the concept of markets being forward looking.
Case 2: Retiring With High-Fee Investments
A retiring physician has been saving diligently for years. But after hearing more about fees and performance data, they finally take a closer look at their portfolio. It’s full of expensive, proprietary mutual funds, and overlapping ETFs, many with poor diversification and lackluster returns. Once benchmarked, it turns out they’ve lagged the market by the exact amount of their fees.
They want to switch to a lower-cost, index-based approach – but they’re hesitant. They’re worried about:
- Realizing capital gains and paying tax
- Leaving their current advisor
- Getting stuck navigating everything alone
Where do you start when you want to switch, but it feels overwhelming? (You call me – duh!)
First, know that it’s never “too late” to improve. Past decisions may not have been ideal, but that doesn’t mean you should stick with something suboptimal for another 20+ years in retirement.
Second, switching doesn’t mean you have to become a DIY investor. You can still work with a financial advisor – just one who aligns with your values, uses a lower-cost structure, and offers clear financial planning advice.
On the tax side, here’s what matters:
- Registered accounts (RRSPs, TFSAs, etc.): You can usually sell, transfer, and reinvest with no tax consequences. These accounts are simple.
- Corporate or personal non-registered accounts: Here, selling may trigger capital gains taxes. But don’t let that stop you outright. Realizing capital gains means resetting your cost base, removing embedded tax liabilities, and setting yourself up for better long-term growth. Over time, the savings in fees and improved diversification often outweigh the tax bill.
We modelled a scenario where someone moved from a high-fee (2.5%) portfolio to a low-fee (1.5%) one, even while triggering $267,000 in tax on $1M in unrealized gains. Despite that initial tax hit, they caught up within about 10 years – and after 30 years, the difference added up to over $2 million in extra growth.
For many professionals with large portfolios, it’s worth running a personalized analysis. But more often than not, the tax concern is a short-term bump – not a reason to stick with bad investments.
Case 3: The Temptation of Hot Investment Ideas
A young business owner is finally building serious savings and sees an opportunity to “go big.” They have some exposure to index funds but think they can spot trends better than the average investor.
Maybe it’s AI. Maybe it’s biotech. Maybe it’s a company in their own field they’re convinced is the next big thing (the last one being most common, and very difficult, mentally, to break away from and accept).
They want to put a meaningful chunk of their portfolio toward this “high-potential” investment.
Is this smart or just another form of gambling?
It’s a natural impulse to want to invest in what you know. And it’s tempting to believe that industry knowledge gives you an edge.
But even if you’re right about a trend, the market likely already knows. Stock prices reflect expected future growth. That means most “big opportunities” are already priced in.
History is full of sectors that were expected to change the world – railroads, the internet, EVs, cannabis. Investors flocked in… and most didn’t end up with the returns they hoped for. In fact, many exciting sectors underperform over time.
Take railways and tech as an example: between 1989 and 2022, the railway stock index outperformed the technology stock index by over 2% per year. Despite all the innovation in tech, valuation and investor behaviour led to underperformance.
The lesson? Even if the story is compelling, that doesn’t make it a good investment.
You can speculate with a small percentage of your portfolio if you want, and it helps you stick to the larger plan. But for your core investments, boring is often better. Broad diversification, low fees, and long-term discipline still win the race. I find that eventually people learn that their speculating just ends up hurting their overall returns.
Final Thoughts
Each of these cases highlights a common thread: financial decisions feel emotional in the moment, especially when uncertainty is involved. But by understanding the underlying principles, we can make choices that support long-term success – even when they feel counterintuitive.
Disclosures:
Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Unit values and investment returns will fluctuate.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
Reference:
Barberis, N. (2000). Investing using dollar-cost averaging. Financial Analysts Journal, 56(4), 41-47.
This paper analytically compares lump-sum investing and dollar-cost averaging strategies and finds that lump sum generally yields higher expected returns.
Don’t let headlines, fear, or sunk costs guide your plan. Focus on what you can control, keep costs low, and stay committed to your long-term goals.
And if your situation feels complex or you’re not sure where to start, that’s exactly what good financial planning is for. Please call us.
