Five Common Investor Mistakes and How to Avoid Them

Given the amount of financial information that swirls around us every day, it’s no wonder that investors get confused.  Sorting through blogs, podcasts and media reports feels like a prospector panning for gold. As an investing instructor, I see some common misconceptions among my students. I think of them as “fool’s gold”— attention-grabbing but worthless. Here’s how to transform this “fool’s gold” into gold nuggets.

 

The TFSA is only for savings accounts, not for investments.

Wrong! A Tax-Free Savings Account (TFSA) can hold the same investments that can be held in a Registered Retirement Savings Plan (RRSP): stocks, bonds, mutual funds, exchange-traded funds (ETFs), guaranteed investment certificates (GICs), and yes, the lowly savings account.  The federal government gets an A for a great investing solution, but an F for the terrible name. They should have named it Tax-Free Investing Account.

 

The RRSP is better than the TFSA because you get a tax break for the RRSP contribution.

Wrong! The two tax-sheltered vehicles give you the same after-tax returns if your income tax rates stay steady over time.  You invest after-tax money in your TFSA and pay no tax on your investment returns. For an RRSP, you invest pre-tax money, get a tax refund, then pay tax on all funds withdrawn from your RRSP.  Both the TFSA and RRSP are excellent choices, but for younger investors, I’d recommend starting with the more versatile TFSA and deferring RRSP contributions until future years when earnings may be higher, (and a higher income-tax bracket), thus generating a bigger tax break.

 

Canada Pension Plan may not be around when I retire.

Wrong! Canadians who have contributed to the Plan can look forward to receiving their Canada Pension Plan (CPP) when they retire since the plan is fully funded, thanks to the higher contributions employers and employees have been paying for many years. (To find out what you’re entitled to, check out the CPP website for more information https://www.canada.ca/en/services/benefits/publicpensions/cpp.html) When looking ahead to retirement, remember that, if you defer your Canada Pension Plan benefits from age 65 to age 70, your monthly benefit will be about 50 percent higher.

 

Interest rates are going up so my bonds will be worth more.

Wrong! This one gets investors every time. Yes, bonds pay a coupon (or interest payment), but the coupon is fixed when each bond is issued. If interest rates go up after the bond is issued, the price of this bond goes down because everyone wants a newly-issued bond with the higher coupon instead. Interest rates and bond prices are inversely related – when interest rates go up, bond prices go down and vice versa. If you hold a bond from when it is issued until maturity, you can ignore these price movements, since you will receive your coupon payments plus your principal when the bond matures. If you hold bonds in a bond mutual fund or exchange-traded fund, however, the value of the bond fund will fluctuate inversely with interest rates.

 

Past returns predict future returns.

Wrong! Past returns can give investors information about what is and isn’t likely, but in no way do past returns provide any guarantee of future returns.  As legendary investor Warren Buffett said, “the rearview mirror is always clearer than the windshield.”  The last word belongs to Yogi Berra: “It’s tough to make predictions, especially about the future.”

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