The Value of Understanding Investment Basics

By Nest Wealth on 25/10/2018Article 3 Minute Read

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Guest Post By: Larry Bates, author of Beat The Bank

As Warren Buffett likes to say, “The best investment you can make is in yourself. The more you learn, the more you earn”. In fact, financial literacy, including an understanding of investment basics, is becoming increasingly vital to the well-being of millions of Canadians.

Previous generations of Canadian workers could afford to be casual observers of investment markets as they relied on guaranteed pensions for their retirement security. Today, of course, most Canadians employed in the private sector have no such guaranteed security. Their ultimate retirement nest eggs and future financial well-being will be significantly impacted by the performance of the markets and the individual investment decisions they make. But while employers have largely handed over the responsibility of retirement security to employees, they have not provided the basic investment knowledge necessary to enable employees to achieve good results.

A massive investment industry has been built to address the retirement saving challenge. The big banks, insurers, asset managers, etc. provide individual Canadians access to investments through DC pension plans, group, and individual RRSPs, TFSAs, etc. The problem is, they charge way too much!

For example, a typical 2% annual mutual fund fee will, over 25 years, consume around 50% of the fund’s total return. In other words, typical Canadian mutual funds pass along only about half of market returns to investors’ retirement accounts with the other half extracted in fees*.

But there is good news. There are a growing number of very efficient, low-cost investment products and services which enable Canadians to keep a much larger share of their investment returns where they belong…..in their retirement accounts. Employers offering DC or group RRSP plans can select lower cost providers and individuals can find lower cost solutions within their own RRSPs or TFSAs or as they depart group plans. Either way, investors need to know the basics in order to take advantage of these opportunities and build bigger nest eggs. That is why I wrote Beat the Bank: The Canadian Guide to Simply Successful Investing.

As described in the book, Simply Successful Investing is founded on three fundamental principles:

First, learn investment basics. Investing can be very simple. In fact, the simpler the better. Learning the basics is all you need to be a successful investor.

Second, think long term. Retirement investing is a marathon, not a sprint. Ignore short-term stock market ups and downs. As an investor in quality stocks, you are a long-term business owner, not a short-term market player.

Third, minimize costs. Over long time periods, markets have produced tremendous wealth. Keep your fair share of your investment gains by keeping fees low.

Canadians can both enhance their well-being today and retire better tomorrow by spending a bit of time learning investment basics. And companies which have handed over some or all of the responsibility for retirement security have a duty to help employees acquire the basic knowledge needed to make better investment decisions.


*As per http://larrybates.ca/t-rex-score/ assuming a 25 year time frame, a 2% annual fee and a 6.4% average annual return on underlying assets. For average Canadian mutual fund fees, see http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?culture=en-CA&id=685965