The March 1 deadline for RRSP contributions for
the 2005 tax year is approaching quickly. Beating the deadline is the easy
part. Choosing among thousands of complex options and strategies for investing
your retirement savings is the hard part.
In her fourth book on retirement planning, Live Well, Retire Well:
Strategies for a Rich Life and a Richer Retirement, Patricia Lovett-Reid,
Senior Vice President, TD Waterhouse Canada Inc., takes a common sense
approach to guide investors through the process.
“People who haven’t gone through a disciplined retirement planning
process often make the same kinds of investment mistakes,” says Lovett-Reid.
“Understanding these mistakes – and owning up to the fact that you may have
made one or two yourself – is a big step forward in building a solid
retirement plan.”
Below are the top ten investment mistakes excerpted from Lovett-Reid’s
book.
1. Putting all your eggs in one basket.
Minimize risk by adopting asset allocation and adding optimal
diversification to your portfolio.
2. Putting all your money in safe, income-generating investments.
Canada’s savings bonds and GICs should be used to park your money,
not to invest it. Their safety is offset by their low yields. These
yields will compound, but they will be eaten away by the compounding
power of inflation.
3. Chasing performance.
Remember the emerging markets fad in the early nineties, followed by
the stock craze in the late nineties. Don’t let it happen again.
4. Procrastinating.
Procrastination turns attainable goals into impossible ones. The best
time to start investing was yesterday, but today is always better
than tomorrow.
5. The failure to adopt asset allocation.
A long time frame, asset allocation and diversification should offset
much of your portfolio risk while improving returns. According to a
Merrill Lynch study, investment advisers believe the failure to
observe basic investing fundamental like asset allocation or
rebalancing are the biggest mistakes their clients make.
6. Misjudging your risk tolerance.
Many investors have overly optimistic assumptions about their
investments and accept more risk than they should because of this.
The longer you can stay invested, the less you risk (as defined by
volatility). But just how long do you have to be invested? If you
think it’s until retirement, you’re mistaken. It’s actually longer.
Your retirement assets must support you throughout retirement, which
means that some equity exposure well beyond retirement is necessary
for most of us.
7. Timing the market.
Knowing when and which sector, market or investment will outperform
is impossible, just as predicting the future is impossible. The best
solution is to buy good securities and hold onto them.
8. Not knowing what you own.
This is particularly true in regards to mutual funds. Know what is in
each fund.
9. Underestimating and the impact of compounding, taxes and inflation.
The power of compounding should never be overlooked. A 10% annual
return in a sheltered RRSP becomes a 12.2% gain after only five
years. Unnecessary taxes can eat away at your compounded returns. And
so can inflation – even the low inflation we are experiencing now.
10. Not having quantifiable, realistic goals.
To ensure success, develop and write down short (less than twelve
months), mid-range (one to five years) and long-range (over five
years) goals. Quantify these goals and then devise a plan to attain
them. If you don’t quantify these goals, you can’t assess the success
of your investment strategy.
“Avoiding these mistakes is not the same thing as having a retirement
plan,” concluded Lovett-Reid. “But it will definitely get you moving in the
right direction. After you’ve taken them to heart, it’s time to sit down with
a professional financial advisor and start planning for a richer retirement.”
