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.

Related: Why investors should embrace simple solutions

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.

Related: Steak knives, yes. Financial advice, maybe not.

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.

Related: The beginners guide on how NOT to start investing

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.

Related: How the behaviour gap affects investor returns

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.

Final thoughts

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.

Related: A wise investor is an informed investor

Take the emphasis off short-term performance and look at your long-term objectives.

Empower yourself to make proper decisions.

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14 Comments

  1. OneTrueKinsman on August 6, 2014 at 5:01 am

    One of the biggest issues I have is finding a course I can take that will give me the foundational knowledge I need to move forward with. I live just outside of Toronto and, in my preliminary searches, most of the courses are built for those interested in pursuing a career in the financial industry. Do you know of any ‘layman’ courses that may be offered by UofT, Seneca, or any other post-secondary school?

    • Potato on August 6, 2014 at 1:02 pm

      Course? There are some options. Ellen Roseman typically offers a short course through each of UofT’s and Ryerson’s continuing education programs (the Ryerson one tends to focus more on basics of financial literacy like budgeting and avoiding fraud). Usually in the fall.

      Does it have to be a post-secondary school offering it? There are independents.

    • Boomer on August 6, 2014 at 5:25 pm

      @OneTrueKinsman: The Canadian Securities Institute has a course for investors http://www.csi.ca/csc-investors as well as the Financial Literacy Learning Centre http://www.flic.ca

      The Ontario Securities commission has a good website http://www.getsmarteraboutmoney.ca (free)

      As mentioned there are often numerous continuing education courses at secondary schools, community centres and libraries. While they can give good basic information, many are run by financial professionals, so be wary of the sales pitch.

    • Potato on August 13, 2014 at 5:54 am

      And just a few days later, Ellen has announced her fall UofT course:
      http://blog.ellenroseman.com/?p=1764

  2. Stuart Greenley on August 6, 2014 at 9:22 am

    Do you have a link to the 10 question test?

  3. Tawcan on August 6, 2014 at 12:52 pm

    Would be interested to see the 10 question test as well.

    The most important thing to remember is to be humble and continue learning about investing.

  4. Sneal on August 6, 2014 at 2:30 pm

    Good article – I’ve read lots and feel that I’m informed but one of my hurdles as DIYer is trying to find a good software to keep track of returns and analyze where I’m at and what is or isn’t working. Any advice on software – other than excel?

  5. Ben on August 6, 2014 at 4:12 pm

    Would like to see this test…

  6. Len on August 6, 2014 at 4:22 pm

    Myself I don’t even try to understand the rules to investing. I do the best I can. Simple RRSP is all I have, I know it good but its not the best

  7. Boomer on August 6, 2014 at 5:17 pm

    Sorry, the link given http://www.cartiergroup.ca no longer links to the test.

    If you want to test your knowledge go to http://www.gailvazoxlade.com/articles/saving_investing/20questions.html

  8. Rick Manjin on August 6, 2014 at 5:29 pm

    I see it with some of my friends and family members. They think more about how to get the highest possible return but do not save and contribute enough to their TFSA’s, RRSP’s and RESP’s if applicable in their situations.

    Canadians today need to prioritize their RRSP’s, RRSP income tax refunds and TFSA’s yearly.

    A simple example. A friend of mine earns $75,000 a year and does not maximize his RRSP annually.

    If he did that, it would be $13,500 and would get him about a $4,500 annual RRSP income tax refund.

    He then put that in his TFSA yearly. Even at 3.00% GIC’s, he would have $212,500 in 10 years or $498,200 in 20 years or $882,000 in 30 years.

    In 32.5 years, he would have $1,000,000 which $250,000 would be tax free TFSA income and 75% would be taxable RRSP income.

    People should really understand that saving a decent amount every month will build your confidence and then you can start at investments that may earn more than 3.00% a year.

    • Cool Koshur on August 8, 2014 at 8:09 pm

      @Rick Manjin
      You made a good point. RRSP is basically 30% return on investment right there which would otherwise go to taxman. TFSA is ideal for emergency funds and you can tap into it right away with no tax implications even if there is a growth.

      As u said, unfortunately lot of us just don’t get it.

      • Rick Manjin on August 9, 2014 at 10:03 pm

        Cool Koshur, I know a few couples that are paying a total of about $2,800 a month in property taxes, mortgage, insurance, utilities, maintenance and repairs, H.S.T on almost everything etc. for a rental property.

        If they would simply put that money in RRSP’s and TFSA’s earning even a modest 4.00% compounded over many years, they would have a big deal of money.

        In 35 years, it would be about $3,800,000. My numbers are based on a paid off mortgage in 25 years with an average mortgage rate of 4.250% plus 6.00% annual average increases on all property taxes, utilities, insurance, maintenance and repairs, H.S.T. on almost everything etc.

        • Rick Manjin on August 9, 2014 at 10:12 pm

          I forgot to add the non-registered money as well.

          The real total is $4,240,000 in 35 years. Here is the breakdown.

          Non-registered $435,000

          TFSA’s $1,244,000

          RRSP’s $2,561,000

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