Originally I was planning to write about personal bond investing, however I decided to postpone that for now. I read this blog called Greater Fool (http://www.greaterfool.ca/) daily. I first started reading when searching around for Vancouver Real Estate bubble. While I agree with the author, Garth Turner, assessments of Canadian’s RE market and some of his thoughts on economy and government policies, I find myself getting quite worked up over some of his financial/investing advices he gives out to his readers. A lot of his claims about stock market and investing are not suitable for the average person and some of them are just frankly dangerous in my view & experience. Yet these claims are given out almost as financial laws/truism. A lot of his readers look up to him as an expert and follows his advice for their real estate and personal finance decisions. I feel a lot of them are likely to be very disappointed!
Due to the number of claims/statements Garth makes this will be the start of a series of posts. This is a good thing as there are a lot of important topics that I can cover and hopefully clear up some misconceptions. For this post I will just list some of the common claims related to financial investing by Garth in his commentary or responses to reader/commenter questions.
- Inflation will be a concern.
- Interest rate will be going up.
- One should have a percentage of assets in gold as a hedge against inflation.
- One should stay liquid.
- GIC is not an answer going forward and one should not be keeping money in GIC, a guaranteed loss after inflation and taxes.
- It’s easy to build a diversified portfolio earn 6% return in the current environment using preferred shares, medium/long term bank/corporate bonds, sector funds and individual stocks.
- Buy and hold is not going to work, active trading is required.
- Just buying the index will not work, you need to be nimble and buy specific stocks.
- Owning bank preferred shares, or bonds can easily get a 6% pre-tax return and they are safe as none of the Canadian banks will fail, and Canadian banks have never suspends dividends on preferred shares.
- Owning medium/long market bonds from big corporations are perfectly fine, even for short term, as they are 100% liquid and safe. Even short time frame of less than 5 years.
- One should buy preferred shares due to the high dividend yield and tax advantages, even in a rising interest rate environment.
- Keep bonds inside RSP, high growth stocks in TSFA, and dividends stocks & preferred share in non-registered accounts.
- Do it yourself investing is almost guaranteed to fail, one should find a good financial advisor to handle the investments.
- 6% return is a minimum one should get in this market without much risk and any advisor who says it can’t be done should be fired.
- The real risk is not losing money but outliving your money.
- Agree – I think inflation might be a big concern going forward, especially if governments and central banks decide to print, print, print.
- Agree – Too much debt chasing too little money.
- Agree – but not for the same reason. Gold is actually not a good inflation hedge based on performance from 1980s to 2000. However gold is in a bull market and is real money! Understand difference between real money versus fiat currency versus debt-based monetary system and you will know why owning gold is a good idea. Also understand the difference between money, currency, and wealth.
- Agree – when there is too much debt and everyone is borrowing, staying liquid is a good idea. However one has to understand what it means to be liquid.
- Disagree – While GIC rates are low and heavily taxes, GIC can be a very valuable and useful tool. In fact, over the decade, GICs have beaten the S&P500 and likely TSX300 Indices total return (dividends included). Not bad for something that’s guaranteed a loss after inflation and taxes. I will write more about GIC in a future post as for most people, more often than not, they will do better by having a big chunk of their money in GIC.
- Disagree – with long term bonds rates and dividend yields less than 6%, getting a 6% total return after-tax with a balanced portfolio and limited risk is very hard in the current environment. Now if interest rate for long term government bond goes back up to 8% then 6% portfolio return is possible.
- Partial Agree – Buy & Hold will likely not work going forward, but timing the market correct is extremely tough, more luck than skill.
- Partial Agree – Stock investing takes a lot of time and effort to research the companies to buy and at what prices. Expecting high return simply from buying individual stock or sector funds without realizing the time, efforts, and risk involved is recipe for large losses.
- Disagree - Buying bank preferred shared is not without risks. Currently available preferred shares on the market are unlikely to be paying 6% yield. As well, if the preferred are without risk then why aren’t the rich buying them all up? Why did the banks issue them paying such a high rate for something with no risk? How did Citibank and Bank of America’s preferred shares issued in 2007 and 2008 do? A lot of "impossible" things happened during the credit crisis in 2008.
- Disagree - Corporate bonds are not liquid and for individual investors, selling them can be impossible sometimes. They are marketable but that’s not the same as being liquid! Bond has a lot of risks that most people do not realize and it’s not easy for the average investors to buy and sell corporate bonds like stocks.
- Partial Agree – Purchasing income producing investment in a rising interest rate environment only works if you re-invest dividends, keeps purchasing, and don’t plan on selling. Income producing securities move inversely with interest rates.
- Partial Agree – Bonds should be kept in RSP accounts. However keeping high growth stocks in TSFA maybe not the best option for various reasons. Portfolio tax planning is not as simple as where to put different types of investments, even though these are good general guidelines.
- Partial Agree – Most people do not know enough, have enough discipline, or have enough time to manage their own portfolio. However the average investors will not be able to access competent, never mind good financial advisors. Those are only available to high net worth clients, those with $5M or more. The average person with less than $500K to invest is not going to be able to hire a good financial advisor; there just aren’t enough of those around. The ones who are good aren’t going to bother with small time clients when they can get clients with $5M, $10M, or more to invest.
- Disagree – If your advisor tells you that, keep him/her because he’s telling you the truth! That’s a very rare trait as most advisors will not tell clients any possible bad news or things their clients don’t want to hear.
- Partial Agree – Outliving your money is a problem but nothing guarantees that more than risking and losing a lot of it! Risk does not guarantee reward!
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