One of the biggest mistakes I see Canadian investors make, especially when they are just starting out, is short-term thinking.
That usually shows up as chasing whatever is hot right now. It could be a trending sector, a stock with a sky-high yield, or using leverage to try and accelerate returns. The problem is that these approaches often ignore what actually matters.
At the end of the day, your outcome comes down to total return. That is your investment performance with dividends reinvested, measured over time. Not just what you earn, but what you keep.
The simplest way to get there is not complicated. Stay diversified. Keep your fees low. Give your investments time to compound.
The Tax-Free Savings Account (TFSA) helps solve the tax side of the equation. There is no tax drag, no need to adjust for different income types. Everything grows cleanly inside the account.
The challenge is that compounding can feel abstract when you are just getting started. So let’s walk through a real historical example using a low-cost S&P 500 Index exchange-traded fund (ETF).
Source: Getty Images
Why the S&P 500?
The S&P 500 is one of the most widely followed stock market indexes in the world. It holds roughly 500 large U.S. companies, but it is not just a random collection. Companies are selected by a committee based on size, liquidity, and earnings consistency.
It is also market cap weighted. That means the largest and most successful companies naturally make up a bigger portion of the index. As businesses grow and perform well, they take on more weight. Companies that struggle shrink in importance or eventually get removed.
This creates a self-cleansing effect. Over time, the strongest companies tend to dominate the index and drive returns. That matters because in the stock market, a small number of companies are responsible for a large share of total gains.
Trying to pick those winners ahead of time is difficult. Owning the index lets you benefit from them automatically as they rise to the top.
The actual numbers
To put this into practice, let’s use the iShares Core S&P 500 ETF (TSX: XUS). This ETF tracks the S&P 500 for a very low 0.08% management expense ratio, which helps minimize fee drag over time.
Using data from portfoliovisualizer.com, from January 2017 to March 2026, a $14,000 investment in this ETF, with dividends reinvested and ignoring commissions, would have delivered an annualized return of 14.2%. By the end of that period, your investment would have grown to $47,649. That is more than tripling your original investment.
But it was not a smooth ride. In any given year, your returns could swing up or down by around 13%. Your best year would have been a gain of 35.2%, while your worst year would have seen a decline of 12.6%.
That is the part many investors underestimate. Even with a strong long-term performer, you still need to tolerate short-term volatility. If you panic and sell during a downturn, you risk missing the recovery that drives long-term returns.
If that level of fluctuation feels uncomfortable, the solution is not to abandon investing altogether. Instead, you can adjust your portfolio by adding cash or bonds to reduce volatility. The trade-off is lower expected returns, but a smoother ride.
