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One of the most important parts of having an investment portfolio is knowing what is in that portfolio, because 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?
1) 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 an RRSP account.
-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.
2) Mutual Funds
-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 don’t actually understand what you’re actually investing in, what do I actually own here? Do I own a share of this company and what is this company and what are the financials of this company? If you can’t explain to someone what you own, you shouldn’t be forms 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 you can say I own some Canadian and US securities. Well 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. But if it isn’t, you shouldn’t be speculating.
3) What Should I Own?
-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.
-If you’re doing a private placement and the person who’s selling it to you 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 if 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.
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