Lessons Learned
Posted by Gail | Filed under In the News
Yesterday’s post brought a load of comments along with a flurry of emails from people who wanted to talk about how “tricked” they feel by the advisors they have been using, mostly as it related to getting too much mortgage or choosing the wrong kinds of investments. And when I met Cam the Mortgage Man in Victoria last weekend, he told me that he’s seeing people doing a lot of equity take-outs on their homes. Is that desperation to deal with whopping consumer debt or is it the assumption that all’s well with the economy and we’re headed right back to boom-boom times so let’s borrow, borrow, borrow? I dunno.
Last week the Globe and Mail reported that the Federal Deposit Insurance Corporation (FDIC) in the U.S. was seeing red. Turns out that with the run on the deposit insurance pool because of all the bank failures, the deposit insurance fund is tapped out. We in Canada should be counting our blessings that the wholesale hemorrhaging of the financial markets that’s gone on south of the border hasn’t done more to undermine our own financial pillars.
The bleeding isn’t over yet. While the FDIC continues to have cash available for depositors even though it’s insurance fund is in the red, it has had to go back to it’s member banks to raise more money. And they are ponying up. Good thing too since one bank analyst has said that “there are still hundreds and hundreds of banks that are going to fail…:” Ouch!
While the media and the pundits would like us all to believe the worst is past and, to quote Annie, “The sun will come out tomorrow,” we really would be foolish to re-don the blindfolds of ignorance and believe that those guys have our best interests at heart. If we have learned anything from the last year it should be, “The only person who really cares about MY money is ME!”
Okay, so you’ve learned the lesson. You know you can’t spend money you haven’t yet earned – well you can if you use credit, but that’s just plain stupid, right? – and you know you should be saving for the future. You know that taking personal responsibility is the key to being in control.
Being in control doesn’t mean giving up because you don’t know what to do next.
When the markets went into free-fall, investors watched as significant portions of their portfolios evaporated. It’s not surprising then that lots of folks are a little gun-shy when it comes jumping back into the market. Hey, I’m all for a healthy dose of fear if it stops people from making the same dumb mistakes again.
“Taking on More Risk than You Can Handle” is the granddaddy of investment mistakes. It happens when people become impatient with the returns they are earning and decide to go for the gusto. Some fella comes along with an investment that’ll put our portfolio’s performance into overdrive and we throw our money at him. There’s no talk about the potential downsides. Focused on retiring with a b’zillion bucks, we forsake investing in the tried-and-try we’ve been most comfortable with and leap into investments we don’t understand. We let advisors – read SALESpeople — tantalize us with the promise of great returns and even leverage our investments for bigger gains.
I can’t even begin to count the number of letters I’ve received from people who were talked into investments they didn’t understand. Are you kidding me? You handed over your hard-earned money to some Joe with a good story because you didn’t want to say, “I don’t understand what you’re talking about.” I guess you now know the cost of pride, eh?
Believe it or not, many of the investment options available on the street are of questionable quality. I don’t care if your sister made a 36% return in 8 days, or your advisor swears the thing is guaranteed up its wazzoo, if it looks too good to be true, you can bet dogs to donuts it is. If your advisor can’t explain it to you so you can then turn around and explain it to your best friend, you should not be buying it. If it has high fees, be they administrative, management or commissions of any kind, you should not be buying it. And if you’re going to need that money in less than 10 years, you should not be buying anything in the equities arena.
Don’t think the answer to the what-to-buy question is to spread your money over heaps of different investment alternatives. While diversification is a good idea when the strategy is executed properly, lots of people end up deworsifying their portfolios by owning a bunch of mutual funds that all hold pretty well the same investments. Take a page from the book of the new heroes of investing – the guys like Canadian Capitalist – who have been touting the benefits of buying the index.
Of course, you have to be careful where you get your information. Another important lesson we should have learned from the most recent events it is that the quality of the advice we receive has a lot to do with how well we’ll weather a financial storm. All those advisors who made their fortunes loading you into funds that charge whopping management fees and substantial commissions weren’t working in YOUR best interest. Nor were the guys who talked up a blue streak, dazzling you with benchmark comparisons that made their offering look great. Nor the chaps who paid no attention to the tax consequences of the advice they were giving and how long it would be before you’d need to use the money.
Just like lenders who were happy to extend you enough credit to hang yourselves, investment advisors will fall back on the adage, “It’s your money, it’s your responsibility.” And they are right. Gone are the days when we can assume that our advisors are working in our interests. Corporate interests and self-interest are now firmly in first and second place.
Getting educated in investing is one answer. And if you need help, you need to KNOW that the person who is helping you manage your money is a good guy. If there’s a shadow of a doubt in your mind, walk away.
October 6, 2009 at 6:34 am
hello Gail,
Great post today. While I hold a bunch of mutual funds that are diversified among various sectors/capitalizations/countries. I’m glad my financial advisor makes sure I understand the investment before I switch what I’m invested in. I’m also glad that he is a strong believer of buy and hold.
My investments haven’t fully recovered from the hit they took in 2008, but they didn’t lose as much as the TSX did and they are slowly starting to climb again.
regards,
Jason
October 6, 2009 at 8:12 am
Hi Gail. This is a very good post on investing. I’ve been wondering for a while if I should start shopping around for a financial advisor as I do not use one at the moment. I’m not sure if any of your readers here have shopped their advisors, or know of one in the KW area that is reputatble, but I think it’s time I start dealing with someone in the field.
What are you thoughts on Financial Advisors? I know there is a post that you put up a while ago about this, but Gail World, do you have any thoughts on this?
October 6, 2009 at 10:22 am
Minimize your fees, and look at your horizon (how many years before retirement). There are several simplistic planning calculators out there. Also google the self-managed couch potato investment approach.
Consider the above before choosing what is better suited to you, ie: your own planning versus using the services of a financial advisor.
October 6, 2009 at 11:26 am
A CIBC report says that spurred by low interest rates, Canadians added $44-billion to their total debt in the first half of the year even as interest payments fell by $3-billion.
http://www.theglobeandmail.com/globe-investor/personal-
finance/household-credit-defying-gravity/article1313505/
October 6, 2009 at 11:28 am
Great post! I always find it amazing that people will spend money for a hairstylist, mechanic, dentist, chiropractor, etc., yet when it comes to taking care of the very finances that are required to pay for these services people are hesitant on paying any money for a financial specialist.
There are many great advisors and planners that are in the industry, the key is finding someone and establishing trust with that individual. At the end of the day you’re paying for more than their advice, you’re paying for someone that has your best interest in mind and will work with you to help you achieve your goals and objectives.
Pam – I’m formerly from the KW area and know of a few advisors that I trust and have no problem referring. That being said, many advisors are very particular in terms of the clients they work with, so you have to be open to meeting with a lot of individuals and determining who best will be able to meet your needs. Feel free to email me for contact info.
There are many tools available online today, in order to use the tools you just need to learn more about money and what your specific goals and objectives are. Education, mentorship and guidance are great ways to get you on the way to financial prosperity on your own. For those of you that would prefer working with a specialist, just find someone that you trust and that has your best interest in mind.
October 6, 2009 at 12:27 pm
Trying that link again …. http://www.theglobeandmail.com/globe-investor/personal-finance/household-credit-defying-gravity/article1313505/
October 6, 2009 at 12:44 pm
I was a financial adviser for many years. When times are good and markets are up, clients love their adviser, when times are tough and markets go south, many clients blame their adviser.
Regardless of who you choose to take financial advice from, you are ultimately responsible for your money decisions. No one has more of a vested interest in your money than you.
Always know who is paying your adviser and on what basis they are paid – this will make it clear to you who they are really working for.
October 6, 2009 at 12:44 pm
Thanks DanielC – that was a good article.
I’m trying to figure out why people are taking on more debt!? I know that interest rates are low but haven’t they learned anything from the problems in the States? I’m truly baffled by it.
Thanks Gail – as always.. I enjoy your posts and read them every day! I have a question – I own my own business and am pretty much semi-retired in my 30’s and I’m not planning on ever stopping. Would you still recommend that I have RRSP’s since I’ll be drawing a salary from my company even in retirement? I was thinking that maybe TSFA’s would work better for me since there is no tax to be paid back…
Any input from anyone here on this would be appreciated.. maybe I should do both in case I don’t end up working in retirement? I do have a business that I can sell for a good profit but I’m torn on this issue. I don’t like mutual funds and don’t know a thing about index funds… what are Index funds? Hopefully I don’t sound like an idiot lol. Thanks.
October 6, 2009 at 12:53 pm
Didi, index funds are mutual funds that are comprised of the same companies, in the same weighting, that the “indexes” are. For example, the S&P 500 Canada Index is the biggest 500 companies in Canada across a variety of industries (banking, chemicals, etc). The idea being that if the overall stock market does well, you do well but if it doesn’t do well, then you don’t do as well but your loss / gains are mitigated. So in other words, with a mutal fund with everything in energy, though you’re diversified with different companies, your still all in energy so if the sector goes down, you go down. But with an index fund, sure the energy part of your fund goes down, but the banking,chemicals,manufacturing, etc sectors don’t unless everything goes down. In short you basically set yourself up to get a single or a double hit, but you probably won’t hit a homerun – but not strikeout either.
As for your question on an rrsp, it depends on how entirely confident you are that your company will still be around in 30 years and operating well enough to pay you a salary for no work, in effect. Congratulations on that by the way, what’s the name of the business?
October 6, 2009 at 1:17 pm
Thanks Geoff! Ok, now I understand what that means.
I’m in insurance and own my own book of business/clientele. I feel its a pretty stable industry to be in but I would definitely be working in retirement if I choose to continue with it… I would just have to take care of the client’s I already have. Perhaps not be as agressive with obtaining new clients when I retire but I would still be taking care of any existing client’s needs. I’m very fortunate in that I work from home and because of internet, fax and phone I can work anywhere in Ontario. Since I really enjoy working I’m not sure I would like a traditional retirement but I guess you never know what will happen. Perhaps it would be best to have both RRSP and TFSA’s…
Thanks again Geoff. I’m just about to to talk to my financial planner about RRSP’s and retirement planning. I’ll see what he advises about index funds but it sounds like a reasonable way to protect yourself against downward fluctuations.
I have linked my website here if you are interested.
October 6, 2009 at 1:43 pm
Index funds should have low MER fees as well, less than 1% since it’s not very demanding. TD efunds offer index funds from 0.31% to 0.5% or therebouts.
October 6, 2009 at 4:03 pm
Hi Gail,
A colleague of mine suggested I submit a post to this discussion as the Alberta Securities Commission has two great online resources for investors that help address some of the issues being raised here.
One of them is an online resource, Who’s Taking Care of Your Money? (http://asc.icomproductions.ca/includes/modules/FM_Anon/splash.php ) It can help you learn more about who to trust when it comes to your investments, how you can start the process of finding a financial adviser, and what you can do to manage the relationship once you’ve found one.
Secondly, we have just launched a new interactive resource called Investment Scams: How to Protect Your Money (http://asc.icomproductions.ca/includes/modules/FM_Anon/splash.php?passthru=yes&curriculum_id=2 ) where you can learn about four common tactics that are used by scammers: affinity fraud through friends and family, the internet, seminars, and advertisements.
Don’t know how to start or how to research investments? Unsure about your level of risk? Visit our website, http://www.albertasecurities.com or contact your own local securities regulator (http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm ) who can be a great source of unbiased source of information about investing – from someone who isn’t trying to sell you an investment.
Hope this information is helpful and keep up the good work Gail!
Lorinda, Senior Advisor, Investor Education
Alberta Securities Commission