Six Major Mistakes Investors Make
After watching investors for many, many years, I keep seeing investors make the same mistakes over and over again. Here are six (6) of the major mistakes that I see investors making.
First: Most investors usually have far too much invested in Canada. Canada is approximately 2.5% of the World’s Capital Markets and most investors have 65% to 85% Canadian content. Not all World Stock Markets move up or down at the same time. Investors need to be Globally Diversified around the world. World population is estimated to increase from 7.0 billion people in 2015 to approximately 10.5 billion by 2050 (a 50% increase). The population growth in Canada, U.S., Europe, Australia, New Zealand, Russia and Japan is forecasted to be flat to slightly down over that period of time. The growth in population is projected to occur in India, China, Indonesia, the Middle East, South America and Africa. Investors need to be Globally Diversified around the world.
Second: When investor do utilize mutual funds, they usually end up with some form of passive investment management style that closely follows some stock market indices such as the S&P 500, bond indices or some combination of both. Instead, investors should be utilizing professional asset management investing in mutual funds with Active Fund Management. Active fund managers, instead of following and mimicking various stock market or fixed income averages, pick and choose individual investments and the country in which to invest.
Third: The potential loss of purchasing power is something that most investors don’t understand. Investors either ignore or are unaware of the fact that the actual cost of living is increasing at a rate far higher than the core inflation rate that the government gives us. In many instances it is increasing in excess of 10% annually. If you want to see the data to back up that statement, please contact me and I will be happy to give you my sources.
Four: Fallacies of Fixed Income Investing. Given that the cost of living is increasing far in excess of almost all fixed income investments returns (i.e. bonds, G.I.Cs, etc.), the average investor falls behind in purchasing power by investing significant assets in fixed income investments. In addition, the taxes on the interest earned from their fixed income investments is taxed as ordinary income, the least tax efficient way to earn income. Fixed income investments significantly reduce an investor’s performance, compared to equity investments. A larger allocation to equity investments, with adequate advisor oversight, and a reduced fixed income allocation will increase portfolio returns over time. The exception to this portfolio allocation is a recession. Once there is strong evidence of an impending recession, a reduction in equity investments is warranted until the recession bottoms. Once the recession bottoms, a reallocation back into a higher equity allocation is warranted.
Five: Proper Tax Planning is essential but is often overlooked. Different investments have different tax consequences (i.e. ordinary income, dividend income, capital gains, return of capital). Taxation, during an investor’s life and later in their estate, is something that most investors, or their advisors, don’t give adequate attention to. Unfortunately, taxes can and do have a significant impact on an investor’s current net worth or the value of an estate.
Six: Investments or Insurance – It is NOT an either/or proposition. Most people do not have adequate insurance coverage (i.e. life insurance, critical illness insurance, disability income replacement insurance, long-term care coverage, etc.), to cover the risks of life. Adequate life insurance coverage can go a long way to mitigate the effects of taxation, especially in an estate.
If you have made one or more of these mistakes call us for a review of your capital accumulation and preservation strategy.
