One of the most important parts of having an investment portfolio is knowing what is in that portfolio. I’ve seen too many people lose money because they didn’t know what they own.
You take a look at your statement and you’re just clueless. You’re baffled. You have no clue. Should that matter? Does it matter? I say yes. I’ve seen so many people come into my office. They show me a statement. I ask them a basic question, what do you own in your portfolio?
And I see the blank look on their face. “I don’t know, I think I have mutual funds. I think, I don’t know, maybe some stocks in there. I think I own RRSPs.”
Investments vs Accounts
First of all, to clarify, RRSPs and TFSAs are not investments. They are actual accounts. See, a lot of the financial institutions have confused people by offering specials on RRSP term deposits, “Invest now in a RRSP term deposit and get 2.7%!” – so people will think they’re actually investing in a RRSP, but they’re not.
They’re investing in a term deposit, which is in a RRSP account. The account could be anything from a RRSP, TFSA, RRIF, LIRA, joint account or a RESP… These are all different account types.
The actual investments that go in the account types can range from guaranteed investment certificates to bonds, to preferred shares, to stocks, to derivatives on stocks, to private placements, options; all sorts of stuff you can put in an investment.
Now if you’ve never heard of most of those things, don’t feel terrible. A lot of people don’t know what most of those are, although most have probably heard of mutual funds, stocks and bonds at some point in their life.
If you’re new to and you’re placing your first money with a financial institution, there’s a good chance you’re probably going to own a mutual fund. A mutual fund is a trust that owns different securities inside the trust, and you own units of the trust.
You effectively own a sliver of a pool of money, which owns a bunch of different stocks and bonds. Most mutual funds are licensed. They’re on the shelf. There’s usually a process of review by the financial institution. Generally, that’ll be kind of an introductory investment. The problem that I often see is that people will be investing completely on the basis of either someone else’s suggestion and they won’t actually know what they’re investing in.
If you’ve ever invested in a private placement where you’re signing a form that says you may lose all your money and you have any of these questions
- What do I actually own here?
- Do I own a share of this company?
- What is this company?
- What are the financials of this company?
If you can’t answer these questions, you shouldn’t sign any form that says you might lose all your money.
It’s very important to try to at least be able to verbalize what you own. Even if that simply means knowing you own stocks, bonds, and mutual funds. At least then you can say I own some Canadian and US securities. That’s a start.
A lot of people will sometimes venture away from their comfort zone and on a recommendation from a friend and they will invest a big chunk of money. Well that is speculating, right? It’s okay to speculate if it’s within your risk tolerance and you’re able to stomach the losses, because you could actually lose all that money. If this makes sense given where you are in your life, go for it, but if it doesn’t, you shouldn’t be speculating.
If you’re not sure if you should be speculating, you should definitely have a sit down and have a chat with a financial advisor to look at your statement and ask, “Does this make sense that I own this? Does it make sense given my risk tolerance given where I’m at in my life? Is it in the right account?”.
The different tax implications of owning different securities in different accounts matters. A taxable investment in an RRSP makes sense, but a taxable investment in a non-registered account will make that income taxable in your name. That means you’re adding to your income burden.
You’re adding to your tax burden which definitely matters. You should be able to explain what you own. If someone’s ever presented to you a complicated flow through scheme and you don’t understand it, don’t invest in it.
If you’re doing a private placement and the person who’s selling can’t explain it to you, don’t invest in it. If you’re buying a derivative, an option, a future, a call, or a put and you can’t explain what you own and what you’re doing, don’t invest in it. If you’re doing a note of some sort that’s got a really complicated payload structure and you’re not able to understand how that pay structure works, don’t invest in it.
Ideally, the best way for you to protect yourself in these situations where you’re not sure, is to work with a portfolio manager who owes you a fiduciary obligation.
That way, every action in your portfolio is made in your best interest. A fiduciary must always act in the best interest of the client, and the client must always come first. You won’t have to worry about understanding investments, investing in stuff that you don’t know and don’t appreciate.
It’s likely going to save you some money, some headaches, and some time down the line as you’re trying to unwind these losing positions
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