It’s a sad fact that Canadians know a lot less about investing than they think. Confidence can ride high when markets are rising steadily, but when their portfolio takes a beating, doubt sets in.
When more than 4,000 Canadian investors were asked to answer a 10-question investment test only one-third got a passing grade. Only one person got a perfect score, and eight percent got every question wrong.
Related: 5 lessons learned about investing
Many investment advisors rely on the standard know-your-client questionnaire to gauge investor knowledge.
People say, “I’m very knowledgeable. I follow the market. I have lots of experience.” In many cases it turns out they know much less than they thought they did.
Turn back the clock
Up until the 1970’s, most Canadians were basically ignorant about financial markets. They graduated from school, began working for an employer for their whole career and, after 40 years, retired with a pension. There wasn’t much to worry about.
Even in the 1980’s they had the risk-free security of GIC’s that paid interest in the double digits. They didn’t have to worry about complex investment products.
That is no longer the case.
People no longer work for the same employer their whole life and many companies have dropped defined benefit pension plans. Portfolios and retirement income now often depends on the investment decisions people make.
Misinformation is everywhere
The investor’s worst enemy is a brother-in-law or co-worker who brags about the 40 percent return he made on a hot tip.
General conversations can turn out to be very misleading and you shouldn’t make your investment decisions on what your brother or your son tells you to do unless they are knowledgeable and have detailed information about your money situation.
Likewise, information from the media – from BNN to finance magazines and newsletters to financial blogs – can be misleading if taken at face value.
There is a difference between information gathering and useful advice for your specific circumstances.
Many investors fall into the classic trap of chasing yesterday’s news.
How many people dropped their advisors and money managers and jumped into ETF’s or individual stocks because they were told DIY was the way to go to get costs down as low as possible?
Even knowledgeable people have their own biases and their own perspectives. They can’t predict the future any better than you can. Don’t simply follow someone else’s directions to make your portfolio decisions.
Too much choice
Why are investors so confused? After all, we’re inundated with a sea of financial information.
Many new investors are intimidated by the huge number of choices available. They lack basic knowledge about financial terms and about the way different investments work.
What funds? Which stocks? What indexes? Canadian, U.S., global, sector?
How do I start? Should I open an online brokerage account? Which one is best for me? Who can help me? Am I missing out?
Do you have questions about asset allocation? Dollar cost averaging vs lump sum investing?
What the meanings are of MER, IPO, NAV, SPP, DRIP, P/E ratio? What level of risk is associated with different asset classes? What are the tax implications?
How are bond prices affected by interest rates? How is dividend income taxed compared to interest, rental, and employment income?
The investment world can be overwhelming for someone just starting out.
A person can get stuck in “analysis paralysis” and end up not investing at all – leaving money in a savings account paying 0.15 percent.
Passive investment style
There are big gaps in knowledge. Perhaps this is the reason why passive investments – index mutual funds and ETFs – continue to gain market share.
This market share will increase even more in the future as automated investment platforms – “Robo” advisors, a computerized service that maintains your portfolio – gain more prominence. Set it and forget it.
Everyone wants to be an investor. Yet, survey after survey show that investors are plunging in without really understanding what they are doing.
It pays to improve one’s knowledge and to get information from reliable sources. You need to understand, not just the financial products in your portfolio, but how those products fit into a long-term investment plan.
Take the emphasis off short-term performance and look at your long-term objectives.
Empower yourself to make proper decisions.