Accountant Mark Goodfield (aka The Blunt Bean Counter) reviews six common investment errors he has 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.
Duplication of investments
Duplication or triplication of investments, which can sometimes be interpreted as ‘diworsification’, occurs when investors own the same or similar mutual funds, ETFs or stocks in multiple places. A simple example is Bell Canada. Investors 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 bank stocks. Unless one is diligent, or an advisor is monitoring this duplication or triplication, the investor has actually increased their risk/return trade off by over-weighting in one or several stocks.
Laddering fixed-income investments
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 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 investments coming due for reinvestment. Alternatively, rates may drop and you have all your fixed income investments 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% 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.
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 types of 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.
This is an edited version of an article that was originally published for subscribers in the August 2021, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.
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