D. Smith: Paralysis by analysis in the investment world
Consumers can be overwhelmed with investment advice, they sometimes delay making a decision for fear of not making the right decision.
By the time a decision is made, they have not made any money or perhaps even fell further behind financially due to the cost of inflation.
Listening to the media leads to the confusion.
Who is the winner here—the newspaper because you buy the paper or the news channel as you tune in to listen to their commentary on the markets or investing.
Let’s go back to basics. You can leave your money sitting in the bank earning nothing—this benefits the bank because they lend out the money you leave on deposit. This does not financially benefit you.
You can put your money in a GIC earning one per cent per year—your money is guaranteed not to lose money.
This type of investment benefits the bank because they lend out the money you leave on deposit—to make money from the spread on the amount they pay you and another consumer pays the bank to borrow money.
You can invest in individual stocks and bonds and pay your stock broker every time a stock is sold or purchased for you—the brokerage house makes money on the transactions of every buy and sell. Hopefully you will see positive return on your stock portfolio.
You can invest in mutual funds where your money is pooled together with other investors money. You own units which represent your portion of the holdings in the fund.
You can choose between a wide range of investment choices, between ultra conservative to medium to aggressive.
You can invest in index funds which many consumers don’t understand, but they buy anyway, because they think they are saving money on the annual MER (Management Expense Ratio).
An index fund may not hold a sufficient cash position to provide stabilization within the index fund during market volatility.
Investors often jump out of index funds after a steep market decline.
Without an advisor to help you deal with a market decline—it is easy to jump in and out of the market.
You can purchase segregated insurance funds held by a life insurance company; a fund comprised of stocks, bonds, mutual funds, cash or a combination of these assets.
This contract offers investment management and growth potential, the same as mutual funds or index funds; they offer guarantees provided by the insurer.
You may pay a slightly higher MER (Management Expense Ratio) for a segregated fund over a mutual fund because of the guarantees.
Some clients are willing to pay a higher MER and some clients choose not to pay a higher MER and forgo the guarantees.
Consumers have different needs and you should review all the investment options, any fees associated with a purchase, any fees associated with redemptions, any annual fees and any fees if you want to transfer your own money out of a GIC, TFSA, RRSP, RRIF, or stock account.
Money in any financial institution, including banks, credit unions, stock accounts, mutual funds and insurance companies make a profit for their financial institution.
What is your net return on your investment?