People are often surprised when we say that successful investing does not mean you have to “beat the market.” Instead, successful investing is simply that which allows you to meet your financial goals.
Trying to hit “home runs” by picking hot stocks before they jump or timing market swings are activities more aligned with speculating than investing and may actually decrease your chances of meeting your goals. Ultimately, success is less about swinging for the fences and more about staying out of trouble.
Unfortunately, trouble can manifest itself in many ways. The most common troubles that can trip investors up are:
High and hidden fees
Canadian mutual funds have among the highest fees in the world – high fees detract from investment performance and over a long period of time can significantly erode your savings nest egg.
Lack of diversification
Having too few eggs in too few baskets often trips up investors. Canadian investors in particular tend to have a large home country bias, preferring domestic stocks and bonds to foreign ones. This can leave investors overly exposed to the fortunes of specific industries and companies.
Inappropriate investments for your risk tolerance
Investment products marketed with features that seem too good to be true usually are. Investors have difficulty understanding different types of risk such as liquidity risk and credit risk and can be steered towards investment products that are unsuitable for their risk profile.
Under-utilization of tax-efficient accounts
Canada provides some great opportunities for investors to save tax including TFSAs, RRSPs, and RESPs. These accounts are often underutilized or mis-understood with respect to their best use.
Conflict of interest between from sellers of investment products
Investors don’t often ask financial professionals how or how much they will be paid for the products and services they provide. Commission-based compensation and product restrictions open up the potential for conflicts. Don’t assume financial sales people are working in your best interest.
Your own behaviour
This might even be the biggest source of trouble for investors. Unfortunately people just aren’t psychologically wired to make investment decisions that are good for them. Left on our own we tend to sell everything cheap in market panics and buy back in nearer market peaks when sentiment is euphoric – this sell low, buy high cycle is the opposite of what’s good for us.
Investors should assess their current situation to ensure they’re avoiding all six trouble areas. Sometimes a third party expert review will help clarify things. Avoiding trouble is essential for investors to ensure they have the best possible overall investment experience. While securities regulators in Canada are pushing initiatives to increase transparency and reduce conflicts of interest, these initiatives take time and investors must always take responsibility for their financial well being.
Graham Bodel is the founder and director of a new fee-only financial planning and portfolio management firm based in Vancouver, BC., Chalten Fee-Only Advisors Ltd. This blog is republished with permission: the original ran on August 24th on Bodel’s blog here.