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March 19, 2017 | Believe It

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

It’s Skeptics Week on GreaterFool, the blog that never learned how to be embarrassed. Or apologetic. Or be humble. Which is perfectly okay, because it’s always truthy.

Nonetheless, there are non-believers. In the past they’d be smitten, or thrown into a pit with angry, naked social justice warriors, but this is 2017. We’re all feminists now, and prefer simply to mock those we disagree with. So, let’s begin with Joel, a skeptic who believes financial portfolios can’t actually deliver a decent rate of return without big risk:

Huh? A portfolio which returns 6% is not possible from an advisor- they take 1% off the top and NO one is giving 7% . Unless of course you dramatically increase risk and dip into junk bonds. Certainly there are ways to get that number via other avenues : private equity, covered call selling, etc. But not like this.

Well, Joel, we don’t make this stuff up. We can’t. It’s against the investment industry guidelines. IIROC Rule 8712j says any advisor who fibs about portfolio returns “shall have a quart of fire ants released within his shorts.”

A balanced, globally diversified portfolio with 40% fixed income (the safe stuff) and 60% growth assets returned 8.5% in 2016 and has averaged 6.7% over the past seven years, at least two of which had financial markets that sucked (the 2011 US debt crisis and the 2015 oil price collapse, for example). I will (again) touch on the basic components of this in a minute. It ain’t rocket science. Instead, the secret is establishing reasonable asset weightings and sticking with them, no matter what your gut, your loins, your BIL or the little fuzzies on the back of your neck are telling you.

Rebalancing is important in order to keep the weightings on plan. When something shoots higher (like US equities lately) you must have the discipline to nip off gains and distribute them among the poorer performers. Human emotion tells you otherwise – to buy and hold stuff that’s rising and chuck the losers. That’s exactly why 99% of DIY investors never rebalance, and end up losing.

You must also accept the difference between investing and gambling. Most do not. Gambling’s the act of chasing returns, thinking that loading up your TFSA with a penny mining stock your therapist recommended is smart because it’ll soar. But it won’t. You swung and missed. So stop trying to double your money in a month and be happy to do that in a decade. Get rich slow.

Finally, be careful where you get financial advice. The bank’s in the business of flogging you stuff. Over 90% of the dudes calling themselves “financial advisors” are actually salesguys paid to load up your portfolio with mutual funds giving them forever commissions. Talk about conflict of interest. Some advisors chose to be paid by the number of transactions they complete for you. More conflict. So the best option is probably a fee-based one who (as Joel mentions) should charge a management fee of no more than 1% annually of the money you give (tax deductible), and refuses to take compensation from any other source. No conflict of interest. He works for you.

Of course, the online world is teeming with financial sites and all kinds of advice, from bullion licking to stock picking to potato portfolios and mustache mulling. Be careful. Nobody online, including the new robo advisors, will ever take the time to absorb your personal circumstances, work with you on unique tax minimization, or ask about your aged parents or the potential needs of your kids and siblings. You are paying an advisor not just to deliver a 6% or 7% return, but to help you cut tax, split income, prepare for retirement, finance a house or keep you out of the evil clutches of rapacious insurance guys.

And remember how to structure your portfolio. Husband and wife should always have a joint non-registered account to assist in income-splitting, enjoy the tax advantages of dividends and capital gains, and ensure if disaster strikes the remaining partner owns everything. Fixed-income or interest-producing assets (government and corporate bond ETFs etc.) should go into an RRSP. Fast-growing, more volatile things (US small caps or emerging markets ETFs, for example) with higher growth potential should be in the TFSA.

Don’t make the common mistake of loading up your kid’s RESP with safe bonds or GICs, or opening a plan with one of the baby vultures. If you lose your mind and buy a mutual fund, never agree to one with a DSC – deferred sales charge – which will lock you into a MF prison. Don’t buy individual stocks, unless you have a seven-figure portfolio and enough dough to achieve diversification. And always get the right money in the right geography. These days that means only a third of growth assets should be maple.

Wow. Look at that. The bottom of the post, already. That came fast. So tomorrow we’ll review the building blocks of the portfolio Joel says does not exist. Then we can shame him. Don’t miss it.

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March 19th, 2017

Posted In: The Greater Fool

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