Over family dinners and drinks with friends and friends of friends, the conversation usually steers towards investment advice.
“My investment banker at TD tells me that I should buy the Canadian Balanced Fund. Do you think this a good idea? Do you know Alvin?”
I have come to realize that very intelligent people in outstanding professional occupations are ignorant about investing and finances. This is unfortunate, because they are best positioned to grow their capital to become far wealthier before retirement and to enjoy a better standard of living.
More unfortunate is the lack of investing knowledge for hard-working people who hold less lucrative employment options.
As such, I have made it incumbent upon myself to expand our investment section and educate a broader reader base. I am also really bored of writing about investment banking and capital markets.
For our first post, I want to focus on two of the most common pitfalls that individuals with limited investing knowledge face.
A Financial Advisor is for Mortgages, Not For Stocks
When you are in a meeting with a financial advisor from Golden Phoenix Lucky Investments (“GPLI”, a contractor firm that only sells Sun Life or Manulife products such as segregated funds), there will be similarities between their spiel and ours.
1) You work hard for your money and you need your money to work for you;
2) Savings rates are below inflation, so having your cash sit means you are getting poorer by the day;
3) Purchasing equities is the best passive way to grow your income.
That is when our viewpoints diverge and GPLI tries to sell you a high growth mutual fund with a 2.8% management expense ratio. If the market does well, it charges 2.8%. If you lose money, they still charge 2.8%. There is no indication that it will beat the market – especially not to the extent where it would warrant a 2.8% premium.
Anyone can put on a suit and tell you about stocks and bonds. We can tell you that 99% of financial advisors or other “professionals” who peddle funds are glorified salespeople and the knowledge gap between you and them is probably 20 minutes of reading this website (if that).
The more educated and the less incentivized an individual is to make a sale, the less you should have your guard up. Anyone who works on commission and does not themselves have a track record of beating their benchmark does not have your best interest in mind. Their goals are short term and they are looking for a quick close.
Despite media pressure and the popularity of banker bashing, investing has become exponentially more accessible for the common man – with fees and charges falling and the likelihood of getting scammed being restricted by regulation and oversight.
As of 2017, there is no reason to be paying a front-end load or have a deferred service charge. If you hear about these two from anyone trying to sell you a fund, run away. This is no longer best practice and the Big 5 banks do not sell products with these loads anymore – you will most commonly see these being sold by independent contractors affiliated with Sun Life or Manulife products.
The banks will also not encourage you to take on leverage to purchase more funds. Very often, independent advisors will tell you that you can secure a loan at Prime + 1.00% and double your investment. This is a reprehensible practice that should and will, in time, be banned. The interest on the debt will always require servicing, but your equity holdings may not turn out as desired. If the stock market falls, your loss is doubled and you still need to service the interest. This practice is especially unscrupulous when sold to seniors and other vulnerable groups.
An Adviser Told Me That This Segregated Fund Is Right For Me
We write about the unattractiveness of segregated funds in this blog post. This is not to say that segregated funds will lose you money in every case, but there is almost always a far better product that does the same thing with less fees.
I heard I should buy this new hot stock. A friend of a friend made $250,000 with a $5,000 investment!
We need to differentiate between investing and speculation.
Investing is a positive sum game. When you invest in a good company, you buying a small piece of the business. As the business grows, the value of your equity stake grows as well.
Trading or speculation is a zero-sum game, and the inherent value of what you are putting your money behind is not clear. Ultimately, you will only make money if there is a “greater fool” waiting to purchase the asset from you at a higher price.
You will always know “that guy” who made a killing on a penny stock, the run up in mining stocks, the tech bubble, marijuana or bitcoin. This is not something you should look to emulate; the reward is not commensurate with the risk.
We do not recommend any get-rich-quick trading strategy. You are playing a game against traders who have been students of the markets for a very long time and do it as a full-time job, so coming out of a speculative venture with more money than you went in with is difficult. The traders you are up against understand momentum and have well defined entry and exit points. They have precautions and stop-losses and have a view on where the market turns, whereas an amateur can at best hazard an uneducated guess.
The more speculative the stock, the more likely the market is being manipulated. When you are ahead, you may find you are unable to exit your position.
The game is rigged and there are no free lunches. Stick with index funds.