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As part of my writing on financial topics, I get a chance to talk to people about financial matters. I sometimes ask them what were their best and worse financial moves, and/or if they have any advice to pass on. Many of the replies have been enlightening or informative. What follows is a sampling.
1. By far, the worse financial mistake most often cited is investing in labor-sponsored investment funds (LSIFs). The unfortunate include: Gail Bebee (author of No Hype: The Straight Goods on Investing Your Money), Mike from the Four Pillars blog, accountant David Trahair (author of Enough Bull), and Jean Lesperance of the Canadian Financial DIY blog. As previously mentioned, it just goes to show how our tax system leads to sub-optimal investment decisions: the lure of tax concessions cause people to take their eyes off sound investing practices.
2. Michael at the Michael James on Money blog advised being wary of financial advisors. He had signed up with several in succession before becoming a self-directed investor. Even if the advisor is a friend, relative or an all-round nice person, don’t let your guard down: "The financial advisor who fleeced me the most was also the one I found most likeable," he said.
3. The worse move for Mark Ryan of independentinvestor.info was not rebalancing his portfolio enough after the stock market had moved up so much in 2007. He let the bull market raise the relative weight of his stock holding to a level above his preferred risk tolerance.
4. Several sources have said: don’t buy mutual finds; buy the mutual-fund company’s stock. Mutual funds charge high fees and are in the business of growing asset bases, not investor returns, they say. So get on the right side of fund companies and become a shareholder; dividends in Canada are currently over 5% and there should be capital gains in the years to come.
5. William MacKenzie of Weigh House Investor Services (formerly Second Opinion Investor Services) recommends against putting money into GICs. He says investors can get a higher return for the same risk by investing in the banks’ bonds instead. Yes, GICs are government insured but the Canadian banks have Rock-of-Gibraltar financial strength and are unlikely to default. Indeed, the government would step in before such an event came about — the banks are too big and important to the economy to be allowed to fail.
6. One source observed some people rebalance their portfolios by adding new money to underperforming to holdings to bring their relative weight back up to desired allocations. But reallocating funds from the top performers to the low performers was seen as better (or a necessary compliment to rebalancing through cash injections). It incurs an extra commission (to sell), but rebalancing in this manner forces the investor to sell high.
7. Larry Bellehumeur, a sales director with a wireless-communications firm, said his biggest stumble was not seeing the rise in the Canadian dollar. Many of the gains from his U.S. stocks were negated, or substantially offset, by the loonie’s appreciation.
8. "Take your large-cap actively managed funds that closely follow benchmark indexes and replace them with low-cost index funds …," recommended financial adviser Preet Banerjee, who blogs at WhereDoesAllMyMoneyGo.com. Why pay 2.5% a year to a closet-indexing fund when the same effect of tracking the index can be purchased for a fifth to a tenth of the cost?
9. David Shymko of Macdonald, Shymko & Company Ltd has been a financial planner for over 30 years. One of his tips is "Don't co-sign for anyone." Obviously, having seen the personal finances of so many persons, he’s noticed a problem on his count.
10. When asked for what advice he would offer persons in their twenties, forty-something Alan at the Canadian Personal Finance blog answered: "You will be old very soon, enjoy your life, but realize that every dollar you spend now is $16 that you might have when you are retired…. and enjoy time with your family more because that is something you can never buy back."
11. Adrian Mastracci, a portfolio manager KCM Wealth Management Inc. recommended: "Concentrate on debt reduction; it’s your best investment."
12. If you want to learn more about the behavioral finance aspects of investing, Professor Richard Deaves suggests: Investment Madness: How Psychology Affects Your Investing . . . And What To Do About It, by John R. Nofsinger. It’s a good, easy-to-read book and he enjoyed reading it.
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