Today’s podcast focuses on our top 10 biggest investor mistakes. Do you think you might be making some of them?
Find out more today from Senior Financial Advisors Rob McClelland and Mike Connon as they discuss some of these common yet detrimental mistakes.
Transcription
Rob (00:00):
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management. And this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing 10 big investing mistakes.
Mike (00:20):
Is there only 10, Rob?
Rob (00:22):
Well, I like the number 10. Whenever I’m reading things and I see 10 things, I think, “10 is good.” If it says there’s 25, it’s too much reading. 10 I can handle. If there’s only five, it’s not enough. So I thought 10 would be a good one.
Mike (00:35):
Who was the comedian, they said if there was 11 commandments, no one would listen to them.
Rob (00:39):
Well, there you go. 10 commandments, right? I’m going to go to the biggest one, the hardest one, and the one people often want to do. And I’m going to call it moving to cash.
Mike (00:52):
This is a thou shall a kill commandment, is it?
Rob (00:54):
It is. It is. It’s one of those. It’s a really tricky one. And I’ve been at this 31 years. And if I’ve learned anything, it’s this one. You can never move your portfolio to cash, and come out further ahead. Just doesn’t work. And every time you move your portfolio to cash, you’re typically doing it because you’re very nervous about what’s going on. Prices have already dropped and whether it’s the stock market or the real estate market or whatever it is, and you’re going to try and take advantage of it. You’re going to get out. And you’re hoping to buy in at a lower price. And inevitably, you can’t do it.
Mike (01:40):
Yeah. There needs to be… If you just assume the market is random, and let’s say 50% of the time, and 50% of time it’s down, you have to make two correct moves. And when you start doing the odds on that, making one correct move your chance is 50/50. When you go to making two correct moves, your odds drop way down. And that’s where market time becomes issue. It isn’t one move. It’s not just getting out of the market. It’s getting back in. So
Rob (02:03):
Let’s use an example. You’ve got a million dollars and let’s say it’s invested in an RSP account, and you’ve seen a market correction, like we’re going through today in the first half of 2022, and you’ve seen a market correction and things are maybe down 10%. So you had a million now you’ve got 900,000, and you decide you’re going to protect the 900,000. So you move it to cash. And you’re going to wait till things get worse. And then maybe you’re going to get in and be able to put your money in and capture the rebound. I can guarantee you almost that a hundred thousand dollars that you just triggered in a loss is gone forever. You’ll never recover it. It’s gone. You’ve just wiped out 10% of your investment that you will never recover. So why is that? Why does it work that way?
Mike (02:52):
Because after the first 10%, if the next 10% comes, if you were scared of the first 10%, there’s no way you’re going to have the guts to jump in the market when it’s now down 20%. And the news is not 20% worse, it’s a hundred percent worse at that time. And everyone’s telling you to get out of the market. It’s this is going to be a total disaster. The media does no good in telling when to invest. It’s exactly the opposite.
Rob (03:17):
I had a client tell me today that he’s hearing that this could be a 10 to 15 year correction. And it’s that sort of thought and idea and process that scares everybody, right, 10 to 15 years, but if you look back and over the last a hundred years, rarely is there ever anything remotely like that. It just doesn’t exist in history.
Rob (03:43):
Number two, chasing trends. We’ve talked about this numerous times and some big trends are certainly coming to an end. Why don’t they work?
Mike (03:54):
Because whenever the trend is realized, there’s a lot of money going to that trend, which makes that trend too expensive. So by the time you understand what the trend is, it has become too highly priced to take advantage of it anymore. That’s the simple solution. Money goes toward it. When money goes towards something, price, capital goes up, gets more expensive, and it’s not going to produce… If you pay a higher price for something, the expected future returns are less on that item. Simple as it gets. I was even listening to a podcast and they were talking about private equity, because private equity has done so well in the last while. And they say, the problem now is all the money’s moved toward private equity, so you’re paying a lot more for the private equity, because it’s obviously went up by whatever it’s gone up in the last 10 years. So now you’re paying 50% more for that private equity. So your expected future returns are half what they used to be. And that’s just how investments work.
Rob (04:47):
It’s interesting. I was at a golf tournament yesterday and they had a draw at the end and it was a live auction, and they were offering leaf tickets for next year and their first batch they did were green tickets and then they did red tickets and then they did platinum tickets. And what was interesting is because the lease failed in the playoffs once again, prices were low. So they auctioned off the first set of greens and they got, I don’t remember what it was, $300. And then the reds came and they didn’t get much more. They got $350. And then the platinums came, and you’d think, the platinums, those are great seats. They got about the same as they did for the greens. It just kept getting worse and worse.
Rob (05:37):
Now, if you had offered those same tickets, two months ago, you would’ve been getting $800, $1,000, maybe $1,500 from the platinum tickets. So it just shows you sometimes those trends, when they’re moving upwards, they look great, but then they move down just as quickly. And today we’re looking at… Cryptocurrencies seem to be going down every single day. That trend seems to be coming to an end.
Rob (06:03):
Number three, not having enough equity in your portfolio. Why is that a big mistake, Mike?
Mike (06:12):
Inflation. Right now we’re sitting with a, what, six and a half percent inflation rate, somewhere around there? A bond is paying you, what, two, maybe? You’re guaranteed to lose money going forward if you’re sitting in a bond portfolio with this inflation rate, without the equities in there to bring those returns up, you’re going to slowly fall apart.
Rob (06:35):
What’s interesting about the inflation rate is if you look now at the one year, obviously six and a half, if you look at the three year, it’s now over 3%. If you look at the five year, it’s now 3%. And yet inflation over the last four and a half years had only been one and a quarter percent. Yeah. But now the five year number is 3% and the 10-year numbers even 2% and it was 1% before. So inflation can creep up onto you. How do you stay ahead of inflation? You need stocks, companies, equities, whatever we want to call them, or real estate in your portfolio. And you need well more than 50%
Mike (07:17):
And simple. When you have to pay more, when you buy products, you might as well own the companies are selling you those products. Pretty simple.
Rob (07:25):
I like to think of there’s a simple formula. If you only have 50% of your portfolio in stocks, you’re only going to be able to protect against 50% of inflation. If you have 80%, you’re going to be able to protect against 80% of inflation.
Rob (07:41):
What about not saving enough? Savings is hard to do.
Mike (07:46):
It’s tough, because as you said, when you save money, it’s money that you can’t spend. No one likes to not spend money. Everyone loves buying things. And we talked about trips before and all this stuff. So when you’re saving, you are going to remove some from your lifestyle for the later you. So you can enjoy that later on. So savings is a big part. We always discuss the thing that separates a great client from a client that’s not that great is the amount they save. The savers always do well. They never have financial problems. They don’t rely on the markets as much. The people who don’t save money, just have some money invested and hope the market returns going to be 10%, 12% a year and make all their hopes and dreams come through. The savers have a different attitude. They’re going to save the money to make sure they can get whatever they need in life. And the markets are a bonus on top of that. They end up having a very good financial and retirement plan.
Rob (08:38):
It’s interesting. I was meeting with a potential client recently, and he came to me and he said, the biggest problem he has, he’s got a rate of return problem. And I looked at his overall situation, I said, your biggest problem is not a rate of return problem. Your biggest problem is a savings problem. And because your savings are inadequate, you think you’ve got a rate of return problem. You’re having to hit home runs on your little savings that you’re doing. If you got your savings right, your rate of return problem goes away.
Mike (09:11):
Yeah. There’s you can control and things you can’t control. Savings is something you can control. The world is going to produce rates of return. You don’t have control over it.
Rob (09:19):
The next one up is spending savings prior to retirement. So this is a pet peeve of yours. I know it is. How does it start? Do they just start taking their money out, Mike, or do they stop their savings?
Mike (09:35):
Their savings just stops. I don’t know what happens. It happens to great savers. When they get in their 40s, they get their house paid off and everything is perfect, and you think they’re going to have great life, and all of a sudden their attitude changes, and they start to spend money like crazy. And they have a million excuses why they need this. Their wants now become needs, and everything they need, we need this, we need to drive a hundred thousand dollar car. We need this. And I watched them. They were driving a Corolla to our office for years. Now they need a hundred thousand dollars car. And it’s disturbing because all the great retirement plan, sometimes look at their plan, they said, well, this used to work out great. What happened to it?
Mike (10:11):
And I said, well, look, you haven’t saved money in five years. In the plan saving, 20% of your income for these five years. You haven’t done that. The other problem with that is when you start to stop your savings, you increase your spending. So it’s, they’re a flip of each other, right? You’re either saving or spending. So it’s not only that you’re not saving. You’re now spending a lot more money too.
Rob (10:35):
Right? And so you’re when you reach retirement, your spend rate is going to be higher, right. You and I know we’ve had clients that have $50,000 a year, and as a percentage, they save a lot more than those who make $300,000 a year. And it’s always blowing me away because they live within their means. But here it’s the big mistake, A) stopping your savings, and B) even touching a dollar of your savings prior to retirement.
Rob (11:07):
Next up, selling and paying taxes. So what do I mean by that? Well, I’m going to sell some investments. I may sell them for market timing purposes. I may sell them because I need to do some renovations on the house. I need to buy a bigger car. Kids education, whatever it is, and now I’m going to sell, and not only that, I’m going to pay taxes when I sell. And so that really hurts your wealth in a couple of ways. You’re going to pay additional taxes, and you’re selling assets that you were relying on for future growth.
Mike (11:41):
And even worst case scenario. Some people sell money off RSPs, pay the tax money out there. And it’s insane how much money they lose on that just to get some extra cash flow.
Rob (11:51):
So they want 20,000 out of their RSP, they need 20,000 in their pocket. Sometimes they’re going to pay an extra $10,000 in tax to put that 20,000 in their pocket. This one may be a cheeky one. I don’t know. I put it in there. Taking investing advice from your accountant. And I didn’t say tax advice. I said investing advice. What’s been your experience with that?
Mike (12:18):
Most accountants are extraordinarily conservative, and well there’s two sides. There’s accountants that are too conservative, and there’s accountants that are so headstrong not paying taxes they don’t look at the investment behind it, and we saw a lot of this stuff with the old limited partnerships that were out there and all these tax saving investments, and I saw clients came into me with film partnerships that were sold to them by their clients. They lost everything. There was some bad mineral and exploration ones that were sold to them by their accountant. And usually wasn’t their accountant that was selling it to them, they gave the advice for them to go and buy this from someone. And there was no investment left. They save some money in taxes for one year, and then they had no money left.
Rob (13:01):
Accountants by their very nature understand the tax return. And they understand your income. They may or may not understand your expenses, but they understand your income and your taxes. But they don’t typically, and this is probably nine out of 10 of them, understand your full financial situation. You think they do because they do your tax return. But your tax return is only one aspect of it.
Rob (13:26):
Next up, moving to a more conservative portfolio as you get older. How many clients get more conservative as they get older with you?
Mike (13:37):
Some do, but a lot of them… The risk tolerance is the risk tolerance, and some people actually, I found as they get more educated, more experienced, they don’t necessarily get any more conservative. They become more used to the ups and downs in markets. So sometimes it’s a fallacy where you just use that old formula, as people get older they need that percentage of bonds in their portfolio. It doesn’t really work anymore.
Rob (13:59):
You have some of these funds that are marketed as retirement date funds, and they’re often sold in pension plans and companies. And what they’re doing is they’re taking the risk away from the company that the individual who’s going to retire, takes a market hit in their last five years before retirement. And so what they do is they structure the investment strategy to become a hundred percent fixed income by the time the individual retire at age 65. And yet that individual may near live for another 30 years, and now they’re a hundred percent in fixed income. It’s the absolute worst strategy out there.
Mike (14:37):
It’s very difficult because again, they’re just protecting their own firms. And at the end of the day, our goal is to protect clients throughout their retirement until they pass away. And that’s the goal of how we run everything. But when you find these retirement dates, all they’re doing is trying to make sure the firm does not get sued by having to lose any money in any year, but they don’t care if the client has enough money when they’re 80 years old.
Rob (15:01):
Number nine, paying too much in fees. We still see it. I still see it in my conversations with other advisors where the client is still paying two and a half percent a year in fees. Sometimes even more than that, if they’re in seg funds, and it’s frustrating, because as I’ve said, if I started in my first 10 years in the industry, yeah, fees don’t really matter that much. For the last 20 years, I’ve realized fees play a big role. And so you need to keep an eye on your fees. Do you need to be the absolute cheapest out there? No, but you need your fees to be in line with what’s going on in the marketplace. And that’s the important thing, I think.
Mike (15:42):
At least know what your fees are as a starter point.
Rob (15:45):
Understand them. And a final number 10, listening to your friends.
Mike (15:50):
I get a lot of this. It’s funny because it’s not your friends, I’ll say friends and even articles they read sometimes, because your friends don’t know your full financial situation. Your friends know a little piece of your financial situation. But so many times I find people’s friends give them advice and they don’t have a clue about their own particular financial situation. And it’s the worst advice I’ve ever seen. If they only knew everything you could explain to them how bad their advice was. They’d be blown away.
Rob (16:18):
Right. And advice is extremely explicit to the individual, right? You need to understand all the moving pieces before you can give any advice. If you’re giving advice before you understand what the situation looks like, it’s irrelevant.
Mike (16:35):
I find a lot of times, it’s funny, I’ll find… I guess, because a lot of teachers have been teaching all life. So they’re used to telling people, but they don’t say no one else has their pension plan, right. They’re going to give all this stuff, and they give advice to people, they say, yeah, but they’re a teacher. They have a great pension plan.
Rob (16:50):
$70,000 coming in every year, rain or shine, and it goes up every year.
Mike (16:55):
Yeah. You’re in a very different situation. So we get that a lot of time with people just giving advice, but they forget that not everyone’s in the same situation.
Rob (17:03):
10 ideas. I think that’s a good start. Maybe next time we’ll come up with another 10. But those are the 10 big mistakes to avoid. That brings us to the end of another week. This is Rob and Mike with Think Smart from The McClelland Financial Group of Assante Capital Management reminding you to live the life that makes you happy.
Assante Capital Management (17:47):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate And Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information. Please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Estate Management Limited.
