Mistakes

When Al died he left his wife of 49 years a paid-for bungalow worth about $450,000 and a drawer in his desk, in the rec room, marked ‘PRIVATE.” In it Grace found a Canada Savings Bond worth $50,000.

And that was it. Al trusted nobody. He had no pension, but never invested. No RRSP. No tax-free account. No corporate pension, since he was in sales. His wife was shocked.

Investing is hard and most people suck at it. No wonder. Nobody teaches this stuff. If you go to the bank or credit union you’ll likely end up being sold some high-fee mutual funds. When clients catch on, they become skeptical about the whole financial business. Better to invest in bricks, they say, or something safe. They end up like Grace, with 20 years of life left and ten years’ worth of assets.

Others equate investing with stocks, buying shares on spec, some crazy blog’s advice or the hot tip of a relative. After the inevitable losses, they retreat, burned. Few people ever achieve financial security by flipping equities or loading up on gold coins and silver bars. Meanwhile millions of Canadians adopt a one-asset strategy, leveraging real estate to buy more real estate, oblivious to the risk, the tax implications or the lousy ROI.

So instead of GICs, bullion, condos or junior uranium company shares, most people would be better with a boring, middle-of-the-road portfolio of ETFs. Exchange-traded funds. Cheap to own. Built-in diversification. Negotiable and liquid. These funds provide exposure to an array of asset classes, like stocks, bonds or real estate trusts. Once folks become aware of that, the big question is how to weight this stuff within a portfolio.

There should be two objectives. (a) Don’t lose money and (b) get enough growth to achieve your goal. For most people that’s retirement – whether at age 40 or 65 – financial security for the rest of your life. In order to do this you have to quell volatility, mitigating the eternal ups-and-downs of the market which radically affect returns and toy with emotions. Without some way to defeat that you’ll always be tempted to crave assets going up in value and dump them in fear when they fall.

One solution that’s worked for decades is a 60-40 portfolio. Sixty per cent in growth assets and the rest in safe stuff. The equity exposure delivers capital gains and the fixed income pays you to own it. Traditionally when stocks go up, bonds are out of favour and pay little. But when equity markets correct, money flows into the safe stuff, plumping its value. The overriding goal is to build wealth over time without being on a nutso roller-coaster that messes with your head. Over the last half-century this has also performed well, handing investors an average of about 7%.

What can do wrong? Lots, of course. But here are seven of the biggest mistakes people make even with a 60/40 goal.

They think all assets should go up all the time.
Nope. In a balanced and diversified portfolio with several different asset classes that’s impossible. Your portfolio is like a 12-cylinder engine. Some rise, some fall, then they reverse – but you keep moving ahead. Ensure the weightings among the assets are correct, then forget about them until it’s time to rebalance.

They don’t understand the role of bonds.
If doesn’t matter if bonds pay you peanuts since the primary role is to make the portfolio less volatile and also mitigate equity market plops. Augment a small pile of government bonds with higher-paying corporates and provincials.

They buy preferred shares for the wrong reasons.
Preferred shares are stock-bond hybrids currently paying a dividend of almost 5% with less volatility than common stock and delivering a tax advantage. You do not buy them for capital gains, and shouldn’t care much if the capital value declines for a while. Vastly superior to GICs and should form almost half your fixed income component.

They sell losers and buy winners.
Big mistake. Don’t chase returns. Don’t turn paper losses into real ones. Set the portfolio weightings and stick to them.

They fail to rebalance.
Once a year, at least, bring things back into line. Distortions happen when you add or subtract money, when cash builds up from interest and dividends, when equity markets evolve or economic conditions change. Sell winners and buy losers to restore weightings. Most people are utterly incapable of this, so have a few single malts first.

They try to time the market.
You have no idea what’s coming in six months, so why would you ease into a portfolio by dollar-cost averaging? It doesn’t work. When you have money, invest it. The longer you’re invested, the better the outcome. By trying to miss bad days you risk missing the good ones – which are much more numerous. The impact on results can be huge.

They lose patience and go for the kill.
Gold bugs. Crypto crazies. Hot stock pickers. Investors in a hurry looking for outsized returns, thinking they’re the smartest guys in the room usually crash and burn. This is gambling, not investing. Pure speculation. The odds of failure are far higher than those of success. And, no, you’re not special.

Remember that human nature’s the enemy. Emotions will cost you dearly. Man up.