Finding The Best Rate of Return May Be Holding You Back To Creating Wealth [Secret Sauce Ep2]

In our first Canadian Wealth Secret Sauce episode that was released last week, we discussed some of the challenges and hidden roadblocks related to the FIRE movement, financial independence, retire early.

And today, in our second episode, we will take a few minutes to discuss our obsession in Canada and really elsewhere in the US, also comparing what you should do as an investor rather than focusing on what you really are doing. And of course, we’re going to provide some easy fixes to this common roadblock.

Now, before we dig in, I want to thank the handful of you who left ratings and reviews after that first secret sauce episode. Not only did it help us understand that this is something you value and that you’d like to see more of, but also it gives us a little bit of that energy we need to keep going. Without hearing from you, we’ll never know how we can best serve you. So please take a moment and let us know on Apple Podcasts what you’re liking and what we could do better to serve you along your Canadian Wealth Secrets journey.

Now, this episode was inspired by having hundreds of conversations all across 2024 with amazing business owners, investors, and just Canadian wealth seekers in general, just like you, and reviewing their current personal and corporate wealth management strategies.

The reality is, along with the FIRE movement, everybody’s talking about what you should be doing based on the data and empirical evidence. Unfortunately, we’re not seeing it actually happening in practice. So this is people just like you listening to this podcast who know that they should be doing this or should be doing that, but yet when we review what’s going on, it’s not actually translating.

We’re obsessed with this idea of a rate of return. And today I just want to highlight some of the challenges here and how we can maybe overcome this idea and how we can do something better and actually allow it to take us to that end goal, that personal beliefs or whatever it is that you’re after.

So what I clearly see happening and data supports it is Canadians are more obsessed with this idea of rate of return than actually thinking about the amount of money they’re putting into investments. The reality is those who are fighting over a one or 2% difference in return or a management fee or whatever it might be, actually don’t need to be spending any time wasting on this idea.

Here’s a case in point. Take a $10,000 RRSP, okay? Now, for some of you, that doesn’t seem like a lot, and you’re right. For a lot of people, especially when you’re just starting out, you are actually talking about a small portfolio size. So a $10,000 RSP, it could be tax-free savings, it doesn’t really matter where it is. But for an RSP earning 6%, that means that you’re going to increase that portfolio size by about $600 at the end of the year. Whereas you could have increased it by $900 at 9%—sure, 300 bucks. That’s nice, but that’s not a whole lot of time spent working for most people.

Now let’s scale this up a little bit. Okay, let’s talk about a hundred thousand dollars RSP. Some people are gonna go, okay, well my RSP is definitely more than 10,000. How about a hundred thousand? First of all, a hundred thousand, probably not enough to retire off of. So let, let’s get that FIRE movement idea out of the way right now that that’s not big enough yet, but let’s talk about that 6%. It’s gonna grow by about $6,000 as opposed to $9,000 at 9%. So 6% versus 9%. Better, but your account’s still not anywhere close enough to retire on.

Scale it up to a million. Now we’re talking. We’ve got a million dollars in this RSP and 6% is gonna get you $60,000; 9% is gonna get you $90,000. And now we’re seeing there’s actually a significant difference between those two rates. Now it’s worth noting because an RSP that $60,000 is really more like $50,000 and $90,000 is more like $70,000. So the upside isn’t as nice because again, it’s a tax bucket, it’s a tax-deferred bucket and you’re gonna be taxed when you take it out.

However, here’s the challenge, okay? As you’re scaling this thing up, as you’re trying to get started on this journey for many people, or maybe you’re well along this journey, the problem is, is that when we review people’s portfolios, and in particular, I see a lot of RRSPs, and I chat with people about meltdown strategies, I always ask them to share what they are holding in those RSPs so I can see the returns over three years, five years, 10 years, whatever that timeline might be, so that we get a sense as to how it might continue growing as they begin the meltdown process. Because the point of a meltdown isn’t necessarily to make the RSP zero, it’s to make it so that it stays at a reasonable amount without keeping too much in it so that it will ultimately be taxed at a high bracket. So you’re really trying to pull on two different ropes here.

And what we notice is that as the RSP size gets larger, we actually have people’s rational brains being ignored by emotion. Now think back to this $10,000 investment for a second. You can be pretty risky with $10,000 knowing that, hey, I can put it all into equities, or maybe I want to even put it into something maybe even more risky like the Russell 2000 versus say the S&P. And what you’re going to find is that on paper that might make sense. Now, typically what you’re gonna find though is that as you get a little older, your emotions are gonna start getting in the way. When you’re young and when that investment’s small, you’re not going to see that as risky.

So when a $10,000 portfolio drops, say 25% to 7,500, it’s of course upsetting. However, when a million dollar size portfolio of the same asset allocation drops by a quarter million dollars, the effect of the emotional part of your brain can feel devastating. And of course, scaling up from 1 million to 10 million and beyond is of course gonna amplify that outcome.

So for today’s Canadian wealth secret sauce, I’d like to remind you that your investor mindset today is likely very different than where it was 10 years ago. I want you to pause and think about that for a second. I think you’d agree. And I’m telling you right now, whether you wanna believe it or not, that mindset’s going to also be very different 10 years from now. So 10 years ago to today, to 10 years from now. And of course, you can change 10 years to any number of years and it’s going to change.

So I want you to pause and think of where you are in your own Canadian wealth-building journey and recognize that investing more today, more money will be ever more impactful on the outcome than focusing all of your time and effort on trying to find the best investment to put those extra dollars into. Don’t let analysis paralysis hold you back from doing what you should be doing, which is putting more money in, and you can always tweak what you’re invested in later.

As you accumulate assets along the way, you’re gonna start to recognize the importance of wealth preservation, tax efficiency beyond a basic RRSP and tax-free savings account. And you’re gonna begin to recognize that having a conversation with someone beyond your big bank advisor is going to be necessary at that point in the journey if you want to optimize your personal and corporate wealth management strategy.

So friends, if you’re at that point in the journey and you feel that the ideas and the perspectives being shared with you are not serving your specific situation where you are in this journey, feel free to reach out to us. Book a discovery call at canadianwealthsecrets.com/discovery, and we will ensure to get at least one big takeaway for you to walk away with and implement into your own Canadian wealth-building journey.

Alright, friends, if you’re appreciating these Secret Sauce episodes and you want to see them happen each and every week, please leave us a rating and review on Apple Podcasts, on Spotify, on YouTube, or wherever you are listening to this episode right now. We’ll see you next time.