5 Things Self-Directed Investors Overlook
2025-02-11
Even the most experienced investors sometimes fall into simple but costly traps.
• Here are five underestimated aspects that could transform your wealth management… if you stop ignoring them.
- TFSAs and RESPs Are Not Completely Tax-Free
Unlike RRSPs, RESPs and TFSAs do not benefit from the tax exemption provided by the Canada-U.S. tax treaty. Therefore, dividends from U.S. securities held in these accounts are subject to a 15% U.S. withholding tax, which automatically reduces net returns. Let’s say you hold shares of Wells Fargo that pay an annual dividend of $1,000 in a TFSA. A $150 withholding tax will be applied, and since the TFSA is a non-taxable account in Canada, you cannot claim a foreign tax credit on your tax return. The result: a 15% reduction in returns, year after year. But it gets worse. U.S. dividend-paying stocks held in non-registered accounts or with a management company are also taxed unfavorably. U.S. dividends do not qualify for the Canadian dividend tax credit and are instead considered ordinary income, taxed at higher rates. If you have a $200,000 portfolio of U.S. stocks in non-optimized accounts, the combined effect of withholding taxes and Canadian taxes could cost you $30,000 or more over a decade.
- Lack of awareness of capital gains
Many investors don’t realize the enormous impact taxes have on their returns. For example, selling an asset that has doubled in value in a non-registered account generates capital gains tax representing 25% of the total gain (in Quebec, in 2024). In 2021, a well-known US investor, known by the pseudonym “DeepFuckingValue,” made the mistake of failing to plan the sale of his GameStop shares, triggering a tax bill exceeding one million dollars.
- The “Small Cap” Neglect: The Hidden Gem
Between 1926 and 2021, small-cap stocks in the United States generated an average annual return of 12.1%, compared to 10.3% for large-cap stocks. Yet, they often represent less than 5% of self-directed investors’ portfolios. A study by Dimensional Fund Advisors demonstrated that investing just 10% of a portfolio in small caps increased total returns by 15% over 30 years, while also diversifying risk.
- Poor Geographic Diversification
Did you know that Canada represents only 3% of global market capitalization? Yet, many Canadian portfolios are overweight in domestic stocks. The result: excessive reliance on the natural resources and financial services sectors, and limited exposure to global giants. A non-diversified Canadian portfolio generated an average annual return of 6% over 20 years, compared to 10% for a balanced global portfolio, according to a 2023 Vanguard study.
- Costly Procrastination in Bear Markets During the 2020 crash, many investors panicked and sold their stocks, incurring massive losses.
What few realize is that those who held onto their investments or invested more during the crisis benefited from an impressive rebound: between March 2020 and December 2021, the S&P 500 index gained 113%.
• An investor who put $50,000 into the S&P 500 in March 2020 doubled their capital in less than two years. Those who sold at the dip, on the other hand, lost an average of 30%.
The problem with market timing is that the timing of your return is rarely well-planned.
Sources:
https://www.rbcgam.com/fr/ca/learn-plan/investment-basics/the-world-of-global-investing/detail
https://awealthofcommonsense.com/2024/06/is-the-small-cap-premium-dead/
• This publication was prepared by Fabien Major who is a Wealth Advisor for iA Gestion Privée de Patrimoine Inc. and does not necessarily reflect the opinion of iA Private Wealth Inc. The information contained in this text comes from sources believed to be reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on analysis and interpretation dating back to the date of publication and are subject to change without notice. Furthermore, they constitute neither an offer nor a solicitation to purchase or sell the securities mentioned. The information contained herein may not apply to all types of investors.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Regulatory Organization of Canada. iA Private Wealth is a trademark and another name under which iA Private Wealth inc. carries out its activities