Common Investing and Financial Planning Mistakes

October 2024

These are my opinions as a fee-only hourly based financial planner, and your advisor may have differing thoughts. However, if you have any doubts about whether your current financial products are right for you, ask questions. Ensure your advisor gives you a good understanding about your position, and that you are comfortable with the risks. When in doubt, get a second opinion.

Too much money in the stock market, often through mutual funds – use “Financial Planning 101” principles and recognize the difference between safe savings for emergency needs and short-term cash requirements (7 to 10 years) versus long-term investments that may lose you money. See my web site article titled Financial Planning 101 – How Much Money to Put Where. Move your money to safer places when you will need it in the short-term – this applies to your children’s RESP also, which is oft forgotten until the market crashes just before school tuition is payable. Avoid “systematic withdrawal plans” that take a specific amount of cash each month from a portfolio of stock market investments – use it only for fixed income securities. Note that your definition of “short-term” should be no shorter than the period of time before which you expect the stock market to return to full value after a decline. Having too little money in the stock market can also be a mistake if you want to make more money, if you diversify appropriately, and have an understanding of the risks, a net worth to accept losses, and the ability to sleep at night when the market drops.
Overuse of balanced mutual funds. When you need your money, will you need to draw from your balanced funds? What if the stock market has declined? Balanced funds also lose value – how much will depend on the equity content. Also, fees for balanced mutual fund are often as high as equity funds, and higher than bond funds, depleting your interest yields on the bonds held in the fund. See my web site article, My Issues with Balanced Funds.
Too much use of bond mutual funds without understanding the impact of fees you are paying, and the risk of capital losses when interest rates rise (or other factors that affect bond valuations negatively). Compare possible bond fund yields to the certainty of rates on guaranteed investment certificates or term deposits that also carry some insurance protection on your principal from the banking, credit union or insurance industry (CDIC, CUDIC, Assuris, respectively). See my web site article, Bonds and Bond Mutual Funds vs. GICs.
Not asking for a better GIC or term deposit rate than is posted on your financial institution published listings. Ask and you shall often receive a higher rate. Also, not building a “ladder” of GICs / term deposits or individual bonds to minimize interest rate risk. See my web site article on “Laddering” GICs, Bonds and Fixed Income Securities for Better Interest Rates.
Not using a regular monthly savings plan – 5 to 10% of your net pay cheque if you have a company pension or savings plan; 15 to 20% otherwise. See my article on Investing Strategies for Individuals to understand how you should invest, and how to build a portfolio gradually, using dollar cost averaging.
Investing too much in foreign and high risk markets, and general lack of diversification. Do you know the extra risks of investing overseas? See my web site article, Foreign Investing – Is it for You. Inadequate diversification of your stocks, with high concentrations is such areas as oil and gas, gold, technology or any particular sector puts you at higher risk. Having an appropriate balance in foreign markets can improve your rate of return, but it comes with risks that you need to understand. See my comments in #1 above.
Not asking your advisor the tough questions, or not answering their questions correctly, leading to misunderstanding your investment risks and investing inappropriately. Ensure your advisor measures your performance by comparing it to the original investment or retirement plan prepared for you, and by benchmarking your performance to market averages. Also, in addition to considering various types of interest-paying products, your advisor should be considering the pros and cons of different types of stock market based products, such as Exchange Traded Funds, mutual funds and individual stocks, even if they are not licensed to sell them all. Ask your advisor the important questions to reach decisions – see my web site articles, Questions to Ask Your Financial Advisor and Exchange Traded Funds vs. Mutual Funds.
Not saving and investing in the right type of account – regular non-registered savings accounts (consider high interest accounts online) and non-registered investment accounts, Registered Education Savings Plans for children (with government grants), Tax Free Savings Accounts (especially if you are in the lowest tax bracket), Registered Retirement Savings Plans (if expecting to be in a lower tax bracket upon withdrawal), Registered Disability Savings Plans(with government grants for disabled persons), and First Home Savings Accounts (if you have neither owned a home this year nor in the past four years, and are from age 18 to 71). .
Under or over-investing in insurance premiums – do you have the right amount of coverage for your needs, especially life, disability, health and travel insurance. Never leave the country without private travel insurance. Buy term or permanent life insurance as you need or want, but compare premiums among various providers and to the expected payout for the best “investment return” to your beneficiaries. Never cancel a policy without a health checkup and financial advice.
Not having a Last Will and Testament and a Power of Attorney so your savings and investments are disbursed to your chosen beneficiaries. Without these documents, more of your assets will disappear to professional fees and maybe go to beneficiaries other than by your own choosing. Visit a public legal information association web site for more information, such as Community Legal Information in PEI.
Applying for Canada Pension Plan (Or Old Age Security) at the wrong time. See this research paper – Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits. Delaying your application is often the correct answer.
Not getting second opinions or competing proposals before giving someone your life’s savings to manage, and not using the right professional for the job. Review credentials to ensure your advisor has appropriate education and training, get 2 or 3 proposals from differing sales representatives, or a second opinion from a planner who receives no commissions or referral fees from the sale of investments. (And, to protect your savings and investments at a stressful stage in your life, use a specially trained financial divorce specialist (CFDS or CDFA^®) to assist you with the financial aspects of divorce. Some accountants and legal specialists may not have the full training or may lack experience in the special family legislation governing separation.)

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum