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Dale Jackson

Personal Finance Columnist, Payback Time


There is a continuous explosion of investment advice available to the average investor. Whether the source is an established industry website or social media, much of it is rock solid.

But the overriding motive for most investment advice is self-serving from profit-driven businesses or individuals looking for cash and followers.

Bad investment advice is rarely as obvious as a Ponzi scheme from a self-professed ‘crypto king’, but here are four examples of common advice that might not be in your best interest.   

1. You must invest to grow your savings

In a case of robbing Peter to pay Paul, most major Canadian banks that generate profits by lending money also make record profits through investment divisions, which operate at what is termed “arm’s length”. You are Peter and the investment arm is Paul.

While the investment arm makes a great case for putting your money in the market, the arm’s length relationship allows them to omit mentioning when the best investment is paying down debt.

As interest rates on record consumer and student debt levels hold in the mid-teens, and bank-sponsored credit card debt remains as high as 29 per cent, there is no risk-free way to generate investment returns even near that.

Even tax savings from investing through a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) pale in comparison with interest savings from making debt a priority.

2. Big returns require big fees

Big fees actually eat into returns. 

Most Canadians invest for retirement through mutual funds, where fees are calculated as a per cent of the total amount invested each year, known as the management expense ratio (MER).

A typical annual MER on an equity mutual fund is just under 2.5 per cent; some are higher, some are lower. In most cases, the advisor who sells them is compensated by the mutual fund company through a trailer fee, which is baked into the MER. 

That means the return on the fund is reduced by 2.5 per cent every year. For you to get a five per cent return, the fund must generate a return of 7.5 per cent. The fund can be worth the fee if it outperforms its benchmark index, but most mutual funds underperform once the fee is deducted.  

Over time, those fees can add up to tens of thousands of dollars that don’t generate returns by staying invested.      

3. Bond funds are fixed income

Any properly diversified retirement portfolio includes a portion dedicated to fixed income to keep the cash flow secure during market turmoil. 

Since mutual fund companies sell mutual funds, their advisors often recommend bond funds as a substitute.

But unlike bonds and guaranteed investment certificates (GICs), income from bond funds is neither fixed nor guaranteed.  

Bond funds cannot provide that certainty because they invest in a portfolio of fixed-income securities that are often traded on the broad bond market several times before maturity.

In rising interest rate environments like the past two years, the yield on bonds at any given time is higher than it was in the past but lower than it will be in the future, which lowers its present value on the bond market. 

In other words, bond prices are inversely correlated with interest rate changes.

As a result, the average interest rate on the bonds in bond funds had been rising but the bond prices fell because interest rates had been rising.

While yields on bonds and guaranteed investment certificates (GICs) have skyrocketed on the back of a nearly 5 per cent increase in interest rates, the average Canadian “fixed income” fund actually lost money after fees last year and dipped a jaw-dropping 11.5 per cent in 2022. 

4. Always keep cash on hand for emergencies

We often hear finance industry advocates parrot a general rule that households should have between three and six months' worth of monthly expenses in cash for emergencies. 

With higher rates at record levels, household debt is an emergency. 

That emergency money would be better spent paying down interest-generating debt than sitting in a bank account earning zero interest.

Having debt eliminated, or at least under control, leaves households in a better position to deal with emergencies - even if it means temporarily borrowing through a low-interest home equity line of credit (HELOC) only when they occur. 

Those thousands of dollars sitting idly in a bank account every year waiting for an emergency could also be better spent invested in an RRSP or TFSA and compounding.