I used to think that the main factors that kept people from investing in the stock market were volatility and risk. However, a recent conversation with someone I’ll call Jim taught me that the difficulty of finding decent advice is a barrier as well.
Jim runs a successful small business in a rural area. He is at retirement age now and has turned over most of the business operations to his sons. He’d prefer to retire fully, but he still works enough out of his home to draw a minimum wage salary.
Jim’s retirement plan consists of continuing to work at his business and occasionally severing parts of his land to sell. He has some assets in an RRSP, but he’s not sure how much to trust the income he can draw from it. He had his RRSP at one of the big banks for many years, but his results were poor. Recently, he took a recommendation for another advisor who turned out to work for an insurance company. So, now Jim’s in expensive segregated funds, not that he’d heard of “segregated funds” before our conversation.
Jim is savvy enough in the ways of the world to understand that he hasn’t been treated well when it comes to his savings. But he can’t figure out what would be better. At least he understands that he must be paying fees somehow. He asked his new advisor what he pays in fees. The advisor deflected the question several times until Jim finally demanded to know what he pays. The advisor relented and told him. So, now Jim has confirmation that his savings have a huge leak that will severely reduce his retirement income.
If I were in Jim’s place, I’d just sell off the business and the land I don’t need, stop working, and invest the proceeds in mostly stocks. However, that’s because I know how to invest with total costs less than 0.2% per year. Jim’s alternative strategy of selling land in pieces and continuing to work makes sense given that he hasn’t figured out how to get a fair shake with his investments.
This story makes me wonder how many people out there choose investments like real estate or a business because it’s a world they understand. They avoid stocks not because they don’t believe in their long-term growth prospects, but because they understand their own limitations in figuring out how to get decent investment advice.
I think you are on to something. For many people, the only investment they really trust is real estate...truly a one asset, one risk investment strategy that has worked so well for so long now that they won't believe that this could end badly.
ReplyDelete@Garth: Real estate has worked well for boomers, but not nearly as well as they think. I often hear people proudly giving the price they paid and what they think their home is worth now. But they rarely add up what they've spent in property taxes, repairs, insurance, etc. And they rarely compare their return to what they could have received in the stock market. My house has tripled, but factoring in costs it's more like a double, and stocks have performed better over the same period.
DeleteAnd when you convert all the numbers into "today's dollars", the returns look even worse...
DeleteThere is a reason the biggest buildings in Toronto are owned by banks and insurance companies. My hedge against this is to own the companies. If only Jim would listen to your advice and NOT the insurance company.
ReplyDelete@Stockmarket Speculator: Jim's trouble is that he can't figure out who to listen to. It takes significant investing knowledge to distinguish confidently-delivered nonsense from good advice.
DeleteWithin limits, owning banks and insurance companies makes sense. The trouble is that many Canadians have nearly all their portfolios in a few large Canadian businesses. Right now, the idea of any of these businesses failing is unimaginable, but once it happens, we'll look back on it as inevitable.
The flip side is true too. I don't invest in real estate (and don't consider my home to be part of my nest egg) since I don't understand it enough. Any art or "collectibles" I buy are for personal pleasure (and I consider them to have value zero), though I know there are people who trade in them and have made quite some dough.
ReplyDeleteIf I happen to make money on asset categories I don't understand, I accept the windfall with pleasure. If I lose money on them, I don't sweat it since I have low expectations. But investments should be stuff where at least on a high level - not necessarily the details - you can articulate why you expect to make money on them, and also why/under what conditions you might not.
@Martin: Interesting. Feeling more comfortable with stocks than anything else is less common, but it applies to me as well.
DeleteStocks and real estate have performed well. Jim would do well to perform some independent research in both areas and then invest. I believe the number for real estate in Canada is 5% per annum over the last 50 or more years. Although equities do much better the ability to leverage within the real estate market is a large factor in overall returns.
ReplyDelete