It has become increasingly important for individuals to become financially knowledgeable and to be able to plan and manage their financial assets, and especially, to be able to save and invest for their retirement years.
Complicating matters is the shear volume of financial information accessible to retail investors, and the large number of investment options to choose from.
The good news is that several surveys on investor knowledge have shown that the majority of Canadian investors (84% – BMO Nesbitt Burns) are confident that they are managing their investments well.
Informed investors:
- make better decisions
- are more disciplined about sticking with their investment plan
- can converse more knowledgably with their advisors
Gender differences
Sadly, it is suggested that women’s financial knowledge falls behind that of men (Canadian Financial Capability Survey):
- Based on correctly answering five key financial literacy questions related to interest, inflation and risk, Canadian women had lower financial literacy scores than men.
- Women were less likely than men to consider themselves to be “financially knowledgeable (31% vs 43%) and were less likely to state they “know enough about investments to choose the right ones that are suitable for their circumstances” (48% vs 63%).
- In couples where the male partner is mainly responsible for the long-term management of the household finances, only 10% of the women answered the questions correctly.
- On the other hand, when couples share the responsibility for long-term financial management, or where the woman’s contribution to household income is similar to that of their male partner, there is no gender difference in financial knowledge.
Seeking financial advice
One strategy to compensate for lack of financial knowledge is to seek financial advice.
- 52% of women reported that a financial adviser influenced their decisions compared with 44% of men.
However, both males and females with higher levels of financial knowledge also rely on advice from a financial adviser. This suggests that financial knowledge and the use of formal financial advice may complement one another rather than be substitutes for one another.
The 2016 CSA (Canadian Securities Administrators) Investor Education Study revealed that there has been a steady increase since 2006 in the percentage of Canadians working with a financial adviser (56%).
- Seven out of 10 investors use their investment advisers as a source of investing information.
Other sources of investment information include the media (27%), bank websites (26%) and family and friends (26%).
How are we investing?
Even though there is a lot of information available about all types of investments, investors know the most about GICs (58%), and Mutual Funds (55%), and are the least knowledgeable about ETFs (19%).
For the last 10 years, approximately three quarters of investors have rated themselves as “knowledgeable” or “somewhat knowledgeable” about mutual funds. And, interestingly, mutual funds seem to be the primary choice for the majority of investors.
A September 2016 survey commissioned by IFIC (The Investment Funds Institute of Canada) shows that investors have more confidence that mutual funds (86%) would enable them to meet their retirement goals over other investments such as stocks, GICs, bonds and ETFs.
In 2016, nine out of 10 mutual funds were purchased through a financial (investment) adviser – and investors are generally satisfied with the advice given to them.
People under 44, (62%) are more likely to purchase investments online than older people (13%).
Final thoughts
People are obviously paying attention to their investment and financial planning needs. Yet, research still shows that people often know the right things to do, but fail to do the right things.
Our wealth is important and should be taken seriously.
How can we ensure we really are savvy investors and not just think we are?
- Know your investor profile
- Know how much risk you can tolerate
- Be aware of how much you need to save
- Figure out how much you need to live on now and in the future
- Choose the appropriate investments to meet your goals
Spend time educating yourself about personal finance and the markets, and have a general knowledge about investments and how various factors can impact your portfolio. Using a financial advisor can also be a great help.
You can use this quiz – Is it time to fire yourself, or your advisor? – to gauge your investment knowledge and see how well you and/or your financial adviser are managing your wealth.
The stock market has been full-on raging bull since March 2009. Indeed, the S&P 500 bottomed-out at 682 in the depths of the great financial crash, but has since climbed to a record 2,415 as of this writing. Those who started their investing journey in the past eight years have only known markets to rise, but prices will eventually fall. Have we reached peak stock market? Perhaps some recent conversations that I overheard can offer some clues.
I work at a university, an environment in which young Canadians pay close attention to government policies, in particular the proposed decriminalization of marijuana. In anticipation of this change, one group of students invested in Canopy Growth Corp. (TSE: WEED), which is a producer and retailer of medical marijuana.
Canopy was a big hit with investors in 2016, posting returns in excess of 200 percent. Of course, these students got to the party a bit late in the year, capturing a 62 percent gain in November before the stock came down from its high to trade in and around $8 today (same as when they bought it).
Still, a 62 percent gain (albeit short-lived) on their first stock gave them the itch to start trading more frequently and now they own shares in various other fads, including Horizons’ new medical marijuana ETF (HMMJ).
Been there, done that
While discussing this student-stock-picking adventure with a couple of colleagues, both in their early 40s, they revealed that they too fell victim to stock-market euphoria in their college days – but this time it was during the tech boom of the late 1990s.
One claimed he made enough money day trading tech stocks that he was able to pay his entire year’s tuition. The other colleague said he had to drop two classes because he spent more time trading stocks than he did studying. He actually considered dropping out of school to become a full-time day trader. Unfortunately, what seemed like easy money one year turned into disaster the next, as the tech bubble burst and they lost everything.
Funny enough, both talked at length about their big wins, but when I asked what happened they each sort of laughed and said, “well I lost it all on this one stock (Pets.com, anyone?) that I was sure was going to keep going up. If only I would’ve sold earlier!”
Peak Stock Market?
I can’t say for sure whether we’ve reached peak stock market or not. I know that markets move in cycles and we’re in the midst of an unusually long bull market. I do think stories like these can offer some hints as to whether the stock market is approaching bubble territory.
A bubble is characterized by rapid escalation of asset prices that is not driven by market fundamentals but instead propped-up by exuberant behaviour. When stock market euphoria makes its way to university dorms, the greater fool theory takes hold. That’s when investors buy stocks without any regard to their quality in hopes to sell them quickly to another investor (the greater fool) who is willing to pay an even higher price.
Eventually, as it did with the dot-com boom in the 90s, the bubble bursts and neophyte investors like our university friends end up going broke.
Final thoughts
This is not my prediction of a stock market crash. Rather, it’s an acknowledgement that the money made in the stock market over the past eight years has started to pique the interest of the novice retail investor.
These are the investors that don’t bat an eye about investing their house downpayment or wedding fund, even though they’ll need to access it in a year or two. They’ll day-trade with their student loan money in hopes to score a triple-bagger.
Nobody wants to see another 2008-style stock market meltdown, but a sharp correction of 20 percent might bring some much needed perspective to investors and present a nice buying opportunity for those of us with the patience and discipline to take advantage of it.
I’ve been slowly upping my running game and this weekend my wife and I head up to Calgary to race in the Scotiabank Calgary Marathon. I’m still a step behind my wife, who is a more seasoned runner, so I’m entered in the 10 kilometre race while my wife attempts her first half-marathon.
I’m aiming for a sub 55 minute finish for the 10K and my wife will try to beat the 2-hour mark in the half-marathon. Wish us luck!
This Week’s Recap:
Many thanks to Sophia Harris at the CBC for including my advice in her recent story about how Canadians are hoarding $16B worth of loyalty points.
On Monday I shared my unhealthy obsession with saving money.
On Wednesday Marie explored all the great (and frugal) activities you can do this summer to celebrate Canada’s 150th birthday.
And on Friday we opened up the Boomer & Echo mailbag and looked at why more employers are switching from defined benefit plans to defined contribution plans.
Weekend Reading:
Portfolio manager John De Goey says enough is enough – it’s time to put an end to embedded commissions:
PWL Capital’s Ben Felix launched a new video series called Common Sense Investing:
Jason Heath answers a retiree’s question about whether she should hold equities along with her defined benefit pension and GICs.
Jonathan Chevreau confronts the “wonderful” problem of the too-large RRSP:
“Baby Boomers have a huge looming tax problem ahead with their 6-figure RRSPs once it comes time to start withdrawing money or securities from them.”
MoneySense’s David Hodges says to try a balanced approach with early withdrawals to pay less tax and stretch your retirement nest egg.
If you’re working past age 65 beware of this Canada Pension Plan oddity.
Desirae Odjick takes a first-hand and detailed look at buying a house with a partner if you’re not married. For the record, my wife and I also bought our first home together before we were married.
Here’s four big risks of borrowing against your house to pay for home renovations.
It’s survey season and according to the latest one by accounting firm MNP, over half of Canadians are $200 or less away from not being able to pay their bills. Ugh.
Next up, a Manulife survey confirms the painful truth about our household debt:
“70 per cent of mortgage holders surveyed report that they would be unable to manage a 10-per-cent increase in their mortgage payments.”
Rob McLister’s Rate Spy website digs deeper into the Manulife survey and concludes that the survey respondents likely did not have a good grasp on what a 10 percent increase in payments actually meant:
“Since the average mortgage is $201,000, a 10% payment jump works out to $106 a month (on average), assuming a 20-year amortization. To most people, that’s not a colossal dollar increase.”
If you’re having trouble scraping together money to save each month take a look at Mark Seed’s approach to saving money on any income.
Michael James tries to explain why he doesn’t abide by the “pay yourself first” mantra. I get what he’s saying, as we have a similar savings approach that’s hard to explain to others.
The anti-Sean Cooper approach to paying off your mortgage – here’s why Krystal Yee does not want to burn her mortgage early.
Home Capital increased the interest rate it offers on savings accounts and GICs in hopes to attract more deposits. Rob Carrick lays out a compelling case for not biting on the embattled bank’s 5-year, 3.1 percent GIC.
A great read from Morgan Housel: To understand how we process risk, you have to know the story of Austria’s 40-year-old nuclear power plant that has never produced a single watt of energy.
Million Dollar Journey lays out a simple index investing guide for his American readers.
Finally, a terrific piece on the career of airline executive and former head of Air Canada Robert Milton.
Have a great weekend, everyone!