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ROB CARRICK is one of Canada's most trusted and widely read financial experts, with two decades of experience as a business and economics reporter and commentator. He worked on both Bay Street and Parliament Hill before becoming the personal finance columnist for The Globe and Mail ten years ago and is the author of three previous books, including How to Pay Less and Keep More for Yourself. Carrick lives in Ottawa with his wife and family.
GETTING YOU OFF TO A GOOD START
Rule one of being a rookie investor is that you will make mistakes. Rule Two is that some of your mistakes will cost you money. Rule Three is to either get good advice or educate yourself so that you minimize the damage associated with Rules One and Two. To help you in this regard, let’s look at some matters of importance to both new and experienced investors.
FOUR EXAMPLES OF INVESTMENT INDUSTRY PROPAGANDA THAT YOU CAN’T TAKE AT FACE VALUE
The investment industry is forever casting itself in its marketing efforts as a wise and friendly helper that just wants to make you wealthy. Actually, banks, brokerages, fund companies and other financial firms want to make themselves rich, first and foremost. With this end in mind, financial companies spew out all kinds of self-serving chatter designed to make you receptive to the kinds of products and services they sell. Here are some of the most common— well, let’s politely call them exaggerations:
1. We are looking out for the best interests of investors.
In any serious profession, there is an ethic of putting the client first. And then there’s the business of providing financial advice. While there are many highly ethical people in the financial sector, I feel comfortable saying that the prime directive for many advisers and investment firms is to sell products to generate fees and commissions, not to do right by clients.
Financial companies aren’t out to foist their products on you and head for the hills. They want to have a nice relationship with you, based on the concept of them providing a good product that benefits you financially. But, again, the main objective for many is to sell and let everything else take care of itself (or not).
The problem for investors is that they see financial advisers as being on the same level as other professionals like doctors, lawyers and accountants, where there are demanding requirements to entry, strict ethical codes of conduct and organizations that vigorously enforce standards of behaviour. The financial advisory profession is moving in that direction and some advisers are already there. Generally, though, it’s prudent to assume until proven otherwise that the person discussing your financial situation with you is primarily interested in making money by selling you products.
2. You need advice to invest properly.
For many people, this is fact. They need advice because they lack the knowledge or time required to make sound investing decisions for themselves. If this is you, be sure to read Chapter Six, where we look at ways to find an adviser and manage your relationship with one. Don’t buy the financial industry’s nonsense about investing being hazardous to untrained civilians, however. In fact, there’s no reason you can’t be a successful do-ityourself investor if you care to learn the basics before you start out. I can tell you from my experience in talking to Globe and Mail readers that there are people of all ages and backgrounds who are investing shrewdly and effectively on their own. Most seem to really enjoy it, by the way.
A second point about the financial industry’s insistence that you need advice: there’s a lot of self-interest involved here. Simply put, advisers are the sales force through which investments end up in the RRSPs, RESPs, tax-free savings accounts and regular investment accounts of everyday people. Ideally, advisers do in fact provide advice in areas such as building a sound retirement fund, minimizing taxes, avoiding debt and estate planning. But many of them— too many, unfortunately— are mainly interested in generating revenue through commissions and fees that come from selling products. For these advisers, advice is a hollow term that puts a gloss on their function as sellers of product.
Note that being a self-directed investor doesn’t mean you have to work in a vacuum. There are plenty of sources of help and ideas— books (you’re holding one right now), websites, blogs, magazines, newsletters, television and radio programming. You’ll find more on this in Chapter Seven.
3. We know what we’re doing.
Need I bother to elaborate on this point after the financial market implosion that began in 2008? Lehman Brothers, a 158-year-old Wall Street legend, went bankrupt. Merrill Lynch, an investment dealer with roots going back to 1914 and a perennially high ranking on the Fortune 500, became so damaged that it had to be bought by Bank of America. Innumerable hedge funds failed. Widely owned mutual funds lost 40 or 50 per cent of their value. The investing world loves to project a macho aura of extreme competence, but the truth is that a significant number of people either don’t know what they’re doing or are borderline competent at best.
I would not like you to get the idea here that all, or even most, investment people are dangerous to your financial health. Rather, I hope you’ll get over any preconceptions you may have that professional investing people are automatically reliable experts who are qualified for, and deserving of, the job of managing your money for you. Two words of advice: always verify. Ask for references when seeking an investment adviser (Chapter Six has lots more on this theme); check the track record of a mutual fund manager; demand copious documentation when considering investment products that offer something new or make claims that seem to defy the normal rules of investing.
We need to be clear about something when assessing investing professionals. They do make honest mistakes; they are not perfect. Neither are you or I, so we have no right to complain. All we have a right to ask is that the people managing our money are smart and experienced enough to keep mistakes to a reasonable level, both in number and scope.
4. Performance, not fees, is what matters with mutual funds.
People in the investment industry who are mainly concerned with selling products often harp on the idea that fees are immaterial and that bottom-line returns are all that matter. In a simplistic way, this makes sense. If you’re making higher returns than most other funds, then why quibble about a fee that’s higher than normal?
Here’s why. Over the long term, low fees are one of the key contributors to above-average performance. The cost of owning a mutual fund is deducted from its gross returns (reported returns are always net of fees). So the lower the fee, the more there is left over for a fund’s clients. When you consider that most funds tend to deliver average returns over the long term, fees can be a key differentiator in terms of ultimate returns for investors. Low fees do not guarantee good returns, but they are a foundation.
I should point out here that it’s not just me saying so. The people at the independent mutual fund research firm Morningstar Canada use fees as a key criterion in assembling their list of funds that qualify as analyst favourites. “For anyone who regularly reads our fund analyst reports, we may sound like a bit of a broken record on the fee issue,” the firm says on its website at Morningstar.ca. “But the bottom line is, the fees are the one component of a mutual fund’s makeup that you can be certain will detract from performance, and many funds simply charge too much.” Well put.
Just received the book 2 days ago and I really enjoy the no non-sense, no holds barred view of Rob Carricks view of Canadian investing. Read morePublished 21 months ago by The Dividend Jedi
I purchased this in the hope of learning more about Canadian investments and techniques.Unfortunately ,for me at least, it was too basic. Read morePublished on Sept. 22 2013 by Gary Myers
Carrick brings his points across very well and adds a touch of humour. I think it suits a beginner investor who still believes investment firms and banks act in the interest of... Read morePublished on April 4 2013 by Richard P
Carrick is without a doubt one of the least informed 'experts' in financial advice, yet is legitimized by the fact that the Globe and Mail hasn't had anyone else to write for them... Read morePublished on April 3 2011 by Adern
Rob Carrick delivers timely, honest and insightful information as regards the current Canadian investment environment. I highly recommend this book.Published on Feb. 25 2010 by Daniel Scheuneman