My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, July 29, 2019

The Best of The Blunt Bean Counter - Common Investment Errors

This summer I am posting the best of The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting an August, 2011 blog on common investment errors I have observed over the years.

I am involved in wealth advisory for some of my clients as their wealth quarterback, co-coordinating their investment managers and various professional advisors to ensure they have a comprehensive wealth plan. I sort of chuckled when I reviewed this list, as not much has changed in the last eight years.

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Duplication of investments

Duplication or triplication of investments, which can sometimes be interpreted as diworsification, is where investors own the same or similar mutual funds, ETFs or stocks in multiple places. A simple example is Bell Canada. An investor may own Bell in their own “play portfolio,” they may also own it in a mutual fund, they may own it in a dividend fund and they may own it again indirectly in an index fund. The same will often hold true for all the major Canadian banks. Unless one is diligent, or their advisor is monitoring this duplication or triplication, the investor has actually increased their risk/return trade off by overweighting in one or several stocks.

Laddering

This is simply ensuring that fixed income investments such as GICs and bonds have different maturity dates. For example, you should consider having a bond or GIC mature in 2019, 2020, 2021, 2022, 2023 and so on, out to a date you feel comfortable with. However, many clients have multiple bonds and GICs come due the same year or group of years. The risk of course is that interest rates will spike, creating a favourable environment for reinvesting at a high rate, and you will have no fixed income instruments coming due for reinvestment. Alternatively, rates may drop and you have all your fixed income instruments coming due for reinvestment, locking you in at a low rate of return. With the current low interest rate environment, you may wish to speak to your investment advisor about whether shortening your ladder a year or two makes investment sense for you; however, that ladder should still have maturity dates spread out evenly over the condensed ladder period.


Utilization of capital gains and capital losses

Most advisors and investors are very cognizant of ensuring they sell stocks with unrealized capital losses in years when they have substantial gains. However, many investors get busy with Christmas shopping or business and often miss tax loss selling. Even more irritating is that I still occasionally see clients paying tax on capital gains as their advisors have not reviewed the issue with them and crystallized their capital losses. Always ensure your advisor has reviewed with you your personal realized gain/loss report by early December, and the same holds true for your corporate holdings, except the gain/losses should be reviewed before your corporate year-end.

Taxable vs. non-taxable accounts

There are differing opinions on whether it is best to hold equities and income producing investments in your RRSP or regular trading account. The answer depends on an individual’s situation. The key is to review the tax impact of each account. For example, if you are earning significant interest income in your trading account and paying 53% (when I wrote this article initially, the rate was 46%, quite the jump in rates) income tax each year, should some or all of that income be earned in your RRSP?  Would holding equities in your RRSP be best, or do you have substantial capital losses you can utilize on a personal basis? There is not necessarily a one-size-fits-all answer, but this issue must be examined on a yearly basis with your investment advisor. (In 2017 I wrote a two-part blog series on considerations for tax-efficient investing, which you may wish to review. Here are the links: Part 1 and Part 2.)

Tax shelter junkies

I have written about this several times, but it bears repeating, I have observed several people who are what I consider "tax shelter junkies" and repeatedly buy flow-through shares or other tax shelters, year after year.  I have no issue with these shelters; however, you must ensure the risk allocation for these type investments fits with your asset allocation.


Beneficiary of accounts

This is not really an investment error, but is related to investment accounts. When you have a life change, you should always review who you have designated as beneficiary of your accounts and insurance policies. I have seen several cases of ex-spouses named as the beneficiary of RRSPs and insurance polices.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

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