Halloween is almost here, and for adults there isn't really much to fear (except maybe running out of candy). In real life there are some truly terrifying money moves that all investors should avoid. Here are seven money mistakes people make and the fixes that can take your finances from scary to successful.
1. Investing with no destination in mind.
We spend lots of time planning trips, parties and major purchases, but how many of us actually take the time to plan our own future -- retirement, funding our children's educations, or any other significant financial goals? Many people pay no attention to these goals as they are far away, and they think they can always catch up in the future. Or, they put money away but don't think about how much they need or their time horizon.
DO: Create a plan -- you need a road map to get to where you want to be. Time is your friend, and your savings and investment growth will compound over time, but only if you get started now. The magic of compounding can make a substantial difference, beyond what you could imagine.
2. Fearing significant market moves and reacting to them.
There are many negative financial news stories in the media right now, and that has a tendency to drive impulsive financial moves. Fear can cause investors to sell at the wrong time and lose sight of their long-term investment plans.
DO: Remember, markets go through a correction phase from time to time. However, if you have a long time horizon to get to your goals, your investment decisions should not be based on news stories that may only have a short-term impact on the market but on the long-term fundamental views of the economy.
3. Holding investments misaligned with your goals.
There are several thousand investment products available to Canadian investors, including mutual funds, exchange traded products (ETFs), stocks and bonds. The challenge posed to most investors is figuring out which ones to buy. Many new investors make the mistake of basing their decision solely on tips they received from friends, family or on past fund performance. They may not have sufficient equity exposure to align with their growth objectives or they may be holding investments that are too risky.
DO: Investment professionals know that past performance generally does not represent how that investment is likely to perform in the future. A selection of securities based on a well-researched, criteria-based process and tied to the asset class you want it to represent is the best way to develop an investment plan aligned with your goals.
4. Not investing with discipline over the long term.
Investing is a complex field and most people don't have sufficient time to gain the knowledge required to manage it well on an ongoing basis. When you get a hot investment tip from friends about buying or selling, it is often already too late -- markets are efficient and react quickly to news. That means investors often end up buying high and selling low, burning up their hard earned savings. Their portfolios may not be well-diversified or they hold too many securities that do not provide sufficient diversification.
DO: Invest based on a proper plan that includes strategic asset allocation (the percentage of your investment allocated to different types of investments to reduce overall risk) for each of your goals. Take into account your time horizon and your risk tolerance. Review your portfolio regularly, rebalancing as necessary to your strategic asset allocation
5. Not leveraging the power of compounding.
As Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it earns it.... He who doesn't, pays it." Many investors don't start saving early enough and end up having to catch up later in life to reach their goal. By doing this they give up the power of compounding. For example, $500 saved every other week over 30 years at a 6 per cent annual growth rate amounts to over a million dollars!
DO: Start saving early, stay committed to your plan and use the time you have to let your savings grow to reach your financial goals.
6. Not maximizing employer savings programs.
Employers often encourage saving by offering benefit plans where they match employee contributions through pension plans. Employees are often unaware of these programs and therefore do not contribute the sufficient amount that maximizes their employer contribution. This is free money and offers an immediate return on your portfolio which helps it grow significantly over time.
DO: Make an appointment with your human resources representative today to discuss how you can maximize the benefit plan offered by your employer.
7. Incurring high investment costs.
Investing involves a number of costs -- trading costs, foreign exchange conversion fees, management expenses inside fund products, advisory fees, and more. Often, investors do not know the total costs of investing, although they may be paying well over 2.5 per cent of their portfolio value every single year no matter how their portfolio performs. Thinking about it in dollar terms, it amounts to $2,500 every year for every hundred thousand of your savings. And these fees are paid even when the portfolio loses value!
In a low return environment, achieving a five to seven per cent return is challenging, and paying up to 2.5 per cent in costs every year is substantial. In many cases, this is taken out of the fund you invest in and therefore you don't see it explicitly, but it is being withdrawn from your savings on a regular basis.
DO: Ask your investment advisor about the fees you are paying and pay attention to how the total costs are impacting your portfolio.
A version of this blog was previously published on Invisor
Pramod Udiaver is the Co-founder and Chief Executive Officer of Invisor Investment Management Inc., one of Canada's leading online financial advisors that provides personalized investment management services. Passionate about personal finance and a student of financial markets himself, Pramod and his team's mission at Invisor is to simplify investing and help Canadians reach their financial dreams sooner.
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