"You want to slap these people in the head; [they] have to stop listening to their neighbours," says Larry Moser, an investment adviser and Ottawa-based regional sales manager for BMO Retail Investments.
The path to financial success is to follow tried-and-true investment and tax planning rules rather than the whispers of a work colleague or someone at the book club, say experts.
Talk to a professional
Individuals who are just entering the investment phase of their lives — when they are beginning to earn more money and start to save for longer-term goals — really should be getting professional help, Moser said.He insists that this nostrum is not as self-serving as it first appears.
After all, many advisers — admittedly, in most cases, tied to particular institutions — offer their counsel for free.
In addition, middle-income families — two income earners in the $100,000 to $120,000 range — are caught in a financial dilemma.
On the one hand, they still do not have enough cash to absorb the kind of investment errors that are likely to result from following the advice of your brother-in-law or other amateur investors.
Taking a bad stock tip when you only have limited resources could force you to have to re-start your savings plan again and again.Taking a bad stock tip when you only have limited resources could force you to have to re-start your savings plan again and again and cost you the ability to accumulate compounded investment gains over a longer time frame, financial planners say.
On the other hand, to generate enough of a financial nest egg when they retire, the couple still will need to take on more portfolio risk than they might like. Investment mathematics are such that low-risk vehicles often leave people with too little money when they are ready to enter their so-called golden years.
Essentially, just stashing one's saved pennies in the modern equivalent of a mattress is not an option.
"You need your money to grow," Moser said.
Here's the problem: a one-per-cent return means the pair's portfolio will double every seven decades. At seven per cent, the same investment compendium increases two-fold every 10 years.
Use simple but effective savings tools
To get those juicier returns over the lifetime of the portfolio does not necessarily mean entering the impenetrable realm of high-risk investments, such as flow-through shares or exchange-traded funds, Moser says.Instead, you just need to follow — but follow religiously — some basic rules, he says.
Top on Moser's list of easy ways to get strong returns is locking in your mortgage.
Bank of Canada governor Mark Carney, seen above, is expected to raise borrowing rates next year so homeowners should fix their mortgage rates now, advisers suggest. (Sean Kilpatrick/Canadian Press) The Bank of Canada's benchmark interest rate is at a record low. But all predictions have the central bank raising borrowing rates in the next year.
So, you'd be better off fixing your mortgage rate now — BMO currently lends out five-year money at 5.4 per cent — saving yourself any future borrowing increases.
Better still, by just asking your bank, you should be able to extend the life of your mortgage out to the five-year limit even if there are only a couple of years left on the term, Moser says.
"I just did this," he said. "I had two years left, but I got [the bank] to add another three years at the current rate."
Next, set up a continuous savings plan, one that takes a bit out of each paycheque automatically.
By siphoning off some money each month, the couple generally will adjust their spending to accommodate the slightly smaller amount of disposable income, Moser says.
Then, dump that growing pool of cash into a registered retirement savings plans (RRSP), he advises.
The RRSP is perfect for longer-term savings since the person gets the tax break upfront and, in theory, will use the cash when he or she is out of the workforce and paying a lower marginal tax rate, experts say.
If the couple has children, they should carefully examine the establishment of a registered education savings plan (RESP). That vehicle lets the saved money accumulate on a tax-free basis. In addition, Ottawa will match 20 per cent of the annual contribution to a limit of $500 a year, or $7,500 over 15 years, Moser says.
If you start early enough, the accumulated returns will grow exponentially, reducing the need to save as much for college or university in future years.
Assess risk tolerance
As far as what to put into your RRSP or RESP, Moser suggests putting 75-80 per cent in stocks and 20-25 per cent in fixed income.That way, a couple can boost their long-term returns while keeping a decent amount of their savings in relatively risk-free investments, said Moser.
The rest of an investment program depends upon a couple's risk tolerance, he says.
Placing cash in more aggressive investments offers the reward of higher returns and a bigger retirement fund but also holds the threat of bigger losses, slowing down long-term asset accumulation.
But, whatever the middle-income couple decides to do, they should think their plan through and limit the over-the-fence discussions to food or news, not investing advice, Moser says.
