5 Common Investing Mistakes (Part 2)
CC Image Courtesy of tilanza.
Continuing on from Part 1, let's examine some of the biggest mistakes people make with their investments. I think you can invest better than most other people just by avoiding these mistakes.
Not Using TFSA to its fullest: This one really gets me. Whenever I come across people who have some money in the Tax Free Savings Plan (TFSA), I ask what they've invested inside the TFSA. 9 out of 10 times, they stare back at me with a confused look, and say:
"What do you mean? The bank just pays me interest..."
They receive interest because most banks automatically invest your money in GICs. By buying GICs, you're basically lending money to the banks at a super low rate, which the banks use to make money with. For those of you who are in this situation, I have news for you - you can buy all manner of stocks, bonds and funds using your TFSA. In fact, you'd be much better off buying those in your TFSA, than by buying those GICs.
Here's why this bothers me a lot. It's not just that people are short changing themselves by not using the TFSA, although that does bother me too. But mostly, it bothers me because the banks have been taking advantage of people.
As an example, I did a quick Google search for TFSAs, and I found this ad from BMO Get 2.25%* on new money deposited into a BMO TFSA Savings Account. Notice they didn't mention any other option.
This is deliberate. The banks want you to invest in GICs, because that way, the money flows to them. If you buy stocks or bonds, you help whichever company that issued those stocks or bonds. This doesn't help the banks, so they advertise GICs knowing that it's not the best option for you.
TFSA can greatly reduce your tax burden on your investments. If you want If you want an introduction on these topics, you can consult The Short Book on Investments.
Blindly trusting a financial advisor: In the best-selling book 'The Millionaire Next Door', the author interviewed wealthy people, in order to understand how they became wealthy. He found that among other things, wealthy people were knowledgeable about investments.
In one story, the author recited how one particularly wealthy person handled unsolicited calls from brokers pitching their investment ideas. The wealthy person told them that if they're so bright, they should send him their personal income tax returns, to show that they know what they're talking about. Of course, they never followed through.
These people never follow through, because their track records are generally terrible. Let's call most brokers and financial advisors for what they are - salesmen. Nothing more.
One day, I will write a blog post about how to look for a financial advisor. But for now, just remember that you should choose a financial advisor based on the person's long-term track record. Not by how good the person's hair looks. Not by the kind of suit they're wearing. But by their long term track record.
Between Part 1 and Part 2, we've examined 5 of the common mistakes most people make with their investments. These are: Acting with your emotion, Trading too much, Not diversifying, Not taking advantage of TFSAs, and Blindly trusing financial advisors.
In truth, there's more ways that you can personally make mistakes. You might feel overwhelmed by the thought of making such mistakes, and feel the temptation to just keep you cash under the mattress. However, this would be also be a mistake.
Here's the good news. Not making mistakes is relatively simple. I can summarize it with these three words - "buy and hold". Buy all the right investments, and put them in the right place. Once you buy them, hold them. Ignore what your emotions say, ignore what your friends say, ignore what the media says. Just hold. It's really that simple.