The Top Ten Investment Mistakes

Yes, once again it’s that wonderful time of the New Year, when we are inundated with advertisements for RRSP season. According to James Bull, President of Ernst & Young’s Investment Advisers Inc., the most overlooked areas are managing investment risk and after-tax rate of return. Mistakes to avoid:

  1. Timing the market. It doesn’t work. Plus the opportunity cost of holding cash investments tends to exceed potential market losses over time.

  2. Paying income tax on someone else’s capital gains. Most mutual funds charge their shareholders in December for their portion of the capital gains realized from selling assets over the course of the year. The result? You realize immediate taxable income without increasing the value of your units. To avoid the problem, find out when the fund posts its yearly gains, then buy units after that date.

  3. Buying tax-favoured investments (e.g., equity mutual funds, stocks) inside tax-advantaged vehicles (e.g., RRSPs). By placing bonds into a tax-deferred retirement account instead of stocks, your taxable investment income will be taxed at a lower rate than interest income.

  • Focusing only on return and ignong risk. Here, as in so many other ways, there’s no such thing as a free lunch.

  • Having too many eggs in one basket. It’s important to diversify among different investment types (stocks, bonds, cash, international stocks, real estate) as well as within those asset classes.

  • Failing to maintain a sufficient contingency fund. You may be required to sell a long-term investment (a stock or equity mutual fund, for example) in a down market in order to raise cash.

  • Jumping on the bandwagon. The investment fund that all your friends are excited about may not be right for you or your tax circumstances.

  • Refusing to let go. Some securities will never “come back.” Even if they do, the rate of return you receive in the meantime may not rival what you could have obtained on an alternative investment and you could be utilizing the tax loss to reduce other taxes payable.

  • Misunderstanding the meaning of “high yield”. This doesn’t mean more interest income without additional risk. Usually, it applies to a high risk investment such as a junk bond or a mutual fund investing in lower-quality bonds.

  • Failing to implement your strategy in hard times. If your investment strategy calls for investing in a stock fund every month, do it even if you believe the stock market may decline next month.