Many Canadians are struggling to meet their investing goals. A February 2012 Bank of Montreal survey revealed that only 38 percent of Canadians contributed or planned to contribute to their Registered Retirement Savings Plans (RRSPs) before the February 29 deadline.
Whether you’re investing in an RRSP, stocks, or mutual funds, poor planning and mistakes can hinder the growth of your nest egg. Kanwal Sarai, founder of Simply Investing and creator of an online self-paced investing course, offers some tips to avoid common investment pitfalls.
1. Flitting from One Investment to Another
Just because the economy is volatile doesn’t mean your investment strategy should be. Sarai points out that when the stock market drops, people often panic, call their mutual fund companies, and withdraw their money.
These frequent changes can cost investors in fees. Most mutual funds charge various fees, such as initial registration fees, front-end load fees for buying funds, and back-end load fees for selling funds. So, every time investors buy and sell, they incur costs.
“You are making the mutual fund company rich, not yourself,” Sarai says.
2. Putting All Your Faith in a Financial Adviser
The investment landscape can be confusing, prompting many to rely on financial advisers. While advisers can be valuable, it’s crucial to conduct your own research and seek a second opinion when necessary.
“No one cares more about your money than you do,” says Sarai. “A financial adviser is motivated by the commissions they receive. A mutual fund company is motivated first and foremost by profits.”
Relying solely on a financial adviser can also prevent consumers from learning to invest independently.
“Investment education is so important and so very easy to learn,” Sarai says. “But most Canadians spend more time researching which TV, iPad, gadget, BBQ, or car to buy than they do on how to invest safely and responsibly.”
3. Investing Emotionally
Nothing can trigger an emotional response like watching your investment funds decline when the stock market has a bad day. Instead of panicking, it’s better to ride out the storm and avoid the urge to sell.
“Emotions can definitely wreak havoc on your investments,” Sarai explains. “People panic when markets go down and get greedy when markets are up. This emotional response causes people to buy high and sell low, which is the exact opposite of what you should do.”
4. Concentrating on the Short Term
In our era of immediate gratification, it’s easy to overlook long-term investment strategies. However, Sarai advises that Canadians “really need the patience to ride out market downturns and to invest for the long term.”
Market downturns occur every few years and can last several years. In the short term, the market is volatile, but in the long term, it tends to provide great returns. The only way to benefit from these returns is to keep your money invested.
“You need the discipline to stick to one strategy and avoid chasing the latest investment fads,” Sarai says. “Remember, you incur costs each time you sell and buy investments.”
5. Forming Bad Credit Card Habits
What does racking up credit card debt have to do with investing wisely? A lot, according to Sarai.
“Bad credit card habits will negatively impact your investments,” he warns. “Essentially, bad credit card habits lead to more debt, and more debt leads to no money left over for investing.”
By following these tips and avoiding common pitfalls, Canadians can improve their chances of meeting their investment goals and securing a comfortable retirement.
