What Investors Can and Cannot Control: A Guide for DIY Investors
It should be understood that investing can be challenging. In this case, I’m not talking about the process of investing, the purchase of a mutual fund or Exchange-Traded Fund (ETF). Rather, I am referring to the uncertainty, the inevitable fluctuations in the prices of the funds available to purchase, or their underlying stocks. If we are to invest, however, we must decide to do so; that decision is probably the most challenging. These days, the uncertainty introduced into the markets by the U.S. president has only compounded the challenge.
In this blog post, I want to emphasize the importance of focusing on what we can control while acknowledging those financial areas that we cannot. If I have been at all successful, this blog post will help my fellow Canadians distinguish between controllable and uncontrollable factors, enabling better decision-making around investing and other financial matters.
1. The Power of Focus: Why It Matters in Investing
As I mentioned earlier, the mechanics of investing are quite easy. The problem is discerning between meaningful information and “noise,” the constant barrage of market news, economic forecasts, and, especially lately, political uncertainty. A question that I present to my new clients is, “What keeps you up at night?” Although the answer is left wide open, in the context of a financial planning engagement, I am asking about financial matters such as anxiety about whether a client’s money will last throughout their retirement, or whether they have made an appropriate investment decision. Some of these sleep-depriving issues are within our control but some are not. Placing our focus on the things that we can control will help our investing process.
Putting our focus on controllable factors leads to better outcomes because it allows us to make thoughtful, deliberate, and strategic decisions about our finances, instead of reacting emotionally. Implementing savings goals, settling on an asset allocation, and choosing low-cost investments, things we can control, serve us much better than fretting about market downturns, inflation, or interest rate hikes.
At the other extreme, poorer outcomes are almost guaranteed when we obsess over predictions of market crashes. We are more likely to sell when our investments are down, “locking in” losses and becoming extremely cautious about investing once again for fear that another loss is coming. Finally, we might panic buy, probably making the wrong purchase and putting us into a situation where we continue to be anxious. In the meantime, the markets have likely come roaring back resulting in a lost opportunity for having failed to stay invested in the first place.
2. What We Can Control
As investors we have “agency.” In financial decision-making, this means recognizing that, while we cannot control the broader economy, we have the power to shape our financial future through our deliberate choices. Just as a gardener cannot control the weather but can decide what to plant, when to water, and how to protect crops from pests, investors can control how much they save, how they allocate assets, and how they respond to market changes. For example, instead of worrying about stock market volatility, investors who consistently contribute to their TFSAs or RRSPs, diversify their portfolios and stick to a long-term plan are exercising agency, that is, actively steering their financial well-being rather than being at the mercy of external forces.
Here are several areas under our control, with brief explanations for each:
Financial Management
Savings Rate. This is the foundation of our financial security. A high savings rate provides resilience and the ability to regularly invest. Rather obviously, someone who saves 20% of their income will build wealth more quickly than someone saving 5%, even if both earn the same investment returns. Prioritizing savings by automating contributions to RRSPs, TFSAs, and possibly FHSAs, ensures steady progress toward financial goals, regardless of market volatility.
Spending Habits. How much we spend is an unavoidable factor in our ability to invest. A dollar spent is no longer a dollar that can be invested. Thoughtful spending helps us align our money with our values and long-term objectives. Reducing our discretionary expenses, such as dining out frequently or being an “early adopter” of the latest technology, can free up cash for investments, helping us to reach our financial goals sooner. Tracking our expenses and distinguishing between needs and wants ensures that our money is working efficiently for us.
Debt Management. Interest rates and lending conditions are creatures of larger economic forces, but how we manage debt is entirely within our power. We do well to avoid unnecessary borrowing and prioritize the repayment of high-interest debt over low-interest debt. For example, it makes eminent sense to rapidly pay down a credit card charging 20% interest before investing in a balanced portfolio from which we expect a long-term return of 5%. The effective return on the debt repayment is significantly greater. That doesn’t mean that we should not borrow at all. Few of us can afford to buy a new home or even a new car with cash.
Investment Planning
Asset Allocation and Diversification. Deciding how to allocate investments between stocks and bonds (equities and fixed income, or their fund equivalents) or other assets affects long-term returns and investor’s exposure to risk. A well-diversified portfolio spreads risk across different sectors and geographies, reducing the impact of any single downturn. For example, a Canadian DIY investor might hold a single asset-allocation ETF that has exposure to markets from around the world. Buying VGRO as one such instance, an 80% equity / 20% fixed-income ETF, gains the investor access to over 13,000 different stocks and 19,000 different bonds.
Investment Costs. Fees are one of the few factors investors can control that directly affect net returns. As John Bogle, the legendary champion of index investing noted, “In investing, you get what you don’t pay for.” High-fee funds tend to erode wealth over time, while low-cost ETFs and index funds provide better long-term performance by keeping expenses low. For instance, choosing a broad-market index ETF with a management expense ratio (MER) of 0.25% over an actively managed mutual fund with a 1.60% MER can save thousands in fees over decades, allowing more of the investor’s money to grow. Assuming the same 6% annual return before fees, the after-fee growth of a $20,000 investment held for 20 years works out to a difference of about $14,500 ($61,010 – $46,456). Of course, the actively managed fund is trying to beat index-level returns, but that difference in fees of 1.35% per year makes it difficult to accomplish.
Investment Discipline and Emotional Control. The ability to stay calm during market downturns is one of the most important factors in long-term investing success. Those of us who tend to panic and sell during declines, locking in losses, will probably limit ourselves to Guaranteed Investment Certificates (GICs), capping our returns at somewhere around the inflation rate. On the other hand, those who stay invested typically recover and benefit from rebounds. For example, during the Global Financial Crisis that bottomed out in March 2009, 16 years ago, I remember an investor who saw this as the investing opportunity of a lifetime. Fortunately, he was the type who didn’t invest recklessly and had the money to invest at those low prices. He subsequently saw significant gains as markets rebounded in the months and years following. Staying focused on a long-term plan rather than reacting emotionally leads to better outcomes.
Portfolio Rebalancing. The purpose of regular portfolio rebalancing is to ensure it stays aligned with an investor’s risk tolerance and long-term strategy. Over time, market fluctuations will cause asset allocations to drift, potentially increasing risk. For example, a Canadian investor with an 80/20 stock-bond allocation might find it has shifted to 90/10 after a strong equity market run. Rebalancing by selling some stocks and buying bonds helps maintain the intended risk level, preventing unintended exposure and keeping the investment plan on track. Rebalancing is also a form of selling high and buying low as it forces us to sell down the better-performing asset in favour of buying the poorer-performing asset.
Insurance and Risk Management
Insurance. The purchase of adequate insurance is something within our control. Its purpose is to safeguard our financial security by mitigating risks that are beyond our control. Life, disability, and critical illness insurance provide financial protection for individuals and their families in case of unforeseen events. For example, a parent with young children may purchase term life insurance to replace lost income and cover essential expenses if they pass away prematurely. Similarly, disability insurance ensures a steady income if an injury or illness prevents them from working. By proactively managing risk through insurance, individuals can protect their financial future and reduce the impact of life’s uncertainties.
Tax Planning
Tax Planning. Effective tax planning ensures that more of our money stays invested rather than going to the government. Canadians can strategically use RRSPs for tax deferral, TFSAs for tax-free growth, and FHSAs for home savings with tax benefits. For example, a married couple with young children may prioritize RRSP or FHSA contributions to reduce their taxable income, potentially increasing their Canada Child Benefit (CCB) payments, which are income-tested. This strategy can provide both immediate tax relief and additional financial support for their family.
Seniors can also benefit from strategic tax planning using the TFSA. For instance, a retiree who is required to withdraw a minimum amount from their RRIF may choose to take out more than the minimum and reinvest the excess in a TFSA. This approach not only shelters future investment growth from taxation but also reduces the size of their fully taxable estate, minimizing potential tax liabilities upon death.
Beyond registered accounts, non-registered investments can also be tax-efficient when structured properly. Since only 50% of capital gains are taxable, holding growth-oriented investments in a non-registered account can result in lower tax liability compared to earning fully taxable interest income. Additionally, eligible Canadian dividends benefit from the dividend tax credit, further reducing overall tax burdens. Thoughtful allocation of investments across these accounts can enhance after-tax returns and long-term wealth accumulation.
Retirement Planning
Retirement Planning. Retirement planning isn’t just about saving; it’s also about deciding when to stop working and how to structure withdrawals. Canadians can choose to defer CPP and OAS for higher future benefits, work part-time for supplemental income, or adjust spending to make savings last longer. For instance, retirees who have sufficient assets in RRSPs and other forms of tax-deferred retirement savings may wish to delay CPP until age 70; doing so can significantly increase monthly payments, providing a more stable income in later years.
Estate Planning
Estate Planning. An estate plan ensures that assets are distributed according to one’s wishes while minimizing taxes, legal complications, and potential disputes. Essential components of an estate plan include a valid will, which designates beneficiaries and executors, and powers of attorney for financial and health decisions in cases of incapacity. Canadians can also use trusts to provide for dependents, ensure privacy, or manage assets over time. For example, parents of a child with a disability might establish a trust to provide long-term financial support while preserving government benefits. Additionally, naming beneficiaries on RRSPs, TFSAs, and life insurance policies can help assets transfer smoothly outside of probate. Estate planning is not just about wealth—it’s about ensuring a lasting impact and protecting loved ones from unnecessary financial and emotional burdens.
3. What We Cannot Control (But Must Acknowledge)
The factors above are all within our control, but we must recognize that not every aspect of our lives is controllable. The following lists several categories that are simply beyond our control.
Market Returns. The performance of markets is unpredictable, influenced by countless factors outside of our control, but acknowledging this volatility helps investors stay focused on long-term goals.
Economic Conditions. Broader economic factors, such as recessions or booms, impact investment performance and financial stability, but cannot be directly controlled by individual investors.
Inflation. While inflation erodes purchasing power, it is influenced by economic policies and global trends that are beyond our power to sway.
Interest Rates. Decisions by the Bank of Canada, other central banks decisions, and global financial conditions determine interest rates, affecting borrowing costs and investment returns.
Government Policy and Tax Rules. Changes in tax laws and government policies can significantly affect financial outcomes, but they are beyond our control.
Corporate Decisions. Corporate leadership decisions, including mergers, acquisitions, and management changes, can influence stock performance but are outside an investor’s control.
Currency Fluctuations. Exchange rate movements, driven by global economic forces, can impact the value of international investments but cannot be predicted or controlled.
Geopolitical Risks. Political instability, wars, and diplomatic tensions can have significant effects on global markets, but individual investors have no power to influence these events.
Job Market and Wage Growth. Economic conditions and industries shape the job market, and wage growth is often influenced by broader trends that individuals cannot control.
Housing Market Trends. While individuals can control home-buying decisions, broader trends in housing markets, such as pricing booms or crashes, are influenced by larger economic factors that are beyond individual control.
Longevity Risks. Life expectancy is increasing, but we cannot predict how long we will live, which affects retirement planning and long-term care needs.
4. How to Navigate Uncontrollable Factors
As the list above demonstrates, many things are beyond our control. However, the actions that are within our control can help us to mitigate these uncontrollable factors. Practical advice on managing external uncertainties includes:
Diversification. This is a component of asset allocation. Diversifying your assets broadly around the world and within every sector and industry mitigates the risk of a heavy loss in any one country or sector.
Long-Term Perspective. Assuming you have a time horizon measured in decades, not days, weeks, or months, once you have determined your asset allocation, you can systematically invest according to your plan and not worry about a recession.
Emergency Fund and Risk Management. While risk management is usually associated with insurance, there are other methods by which you can protect yourself financially. One of the first lines of defence is the emergency fund, savings equivalent to three to six months of living expenses, or more if your job is unstable and subject to frequent layoffs. Another suggestion is to manage your debt so that your non-discretionary expenses (debt payments) are lowered.
Scenario Planning. Scenario planning helps individuals prepare for a range of possible future outcomes by considering various economic, market, and life events. For example, a household might create scenarios for both strong markets and a prolonged recession. By developing strategies for each, such as adjusting spending habits, investors can remain adaptable and reduce the impact of difficult financial conditions, ensuring financial security even in uncertain times.
5. Focus on What Matters
I want to emphasize the importance of focussing on controllable factors. Doing so will help us to be resilient when the unanticipated and uncontrollable happens. You may want to ask yourself about how you manage your finances, conducting a self-audit, so to speak. Do you know where your money goes? Are there debts or other payments that are hindering your ability to live more freely? Do you invest consistently, systematically, and broadly, or do you tend to buy individual securities that are touted as the next big thing?
If you find that you have made a successful transition from fretting about the uncontrollable to focussing on the controllable, I’d love to hear about it.
This is the 281st blog post for Russ Writes, first published on 2025-03-10.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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