Three Questions

Last month, during the frenzy of RRSP season, the National Post asked three questions of a number of financial experts. Somehow they neglected to call me, so I thought I would answer these questions in this blog.

1. What is the dumbest financial move you have seen someone make?

I had a client who transferred the commuted value of their pension from a national company. While most of it went into a locked-in RRSP, about 1/3rd was transferred into a regular RRSP. The locked-in RRSP has a maximum dollar amount that can be accessed each year, the regular RRSP does not.

The transfer itself was not the dumb move. The reason for the transfer was.

This client and their spouse were unable to create a budget to accommodate the monthly payment the pension would have provided them. By transferring the pension into RRSPs, they were able to access virtually as much money as they wanted each month.

They retired early, were in good health and had no other source of income or savings. They were as yet too young for CPP and OAS. They had no financial or retirement budget so lived as though they had a regular and unending amount of funds to draw upon. By the time they came to me for financial counselling, they had depleted more than 1/3rd of their RRSP accounts in a matter of 4 years. Even worse, we were in the throes of the 2001/2002 equity meltdown.

They found themselves in a financial spiral. They took the maximum payment from the locked-in RRSP and then took whatever amount they wanted over and above that figure from the regular RRSP. This was bad enough but then when tax time rolled around, they had to withdraw even more funds to pay for their taxes.

There really was nothing to be done for them unless they were willing to help themselves. When we last communicated, they had not yet come to grips with the reality of needing to curb their spending and stick to a strict budget.

2. What is the most common mistake?

After 25 years in this business, the most common mistake I see over and over is people who delegate all decision making for their finances to their financial advisor. These are usually the same people who will spend hours researching and choosing a new car or vacation, but who don't have the slightest interest in their own money.

People, that's how you get taken advantage of.

Now I'm not talking about those of you who admit they don't know much about finances, but at least ask questions and try hard to understand. I'm talking about those of you who couldn't care less and act as if they have much more important things to deal with. I actually once had a client who wanted to buy some mutual funds and wouldn't answer my questions about their risk tolerance, time frame, investing preferences, etc. They eventually lost it and yelled at me to simply sell them something.

Sounds unreasonable but in this busy, busy world, it happens more often than you might think.

3. What is the number 1 rule you never break?

I have diversified my RRSP between 6-8 different funds from a single family of funds, chosen for their long term performance as well as low MERs. When I make a RRSP contribution, without fail I always deposit it into the one fund that performed the worst over the previous 12 month period. This isn't always an easy decision and it rarely pays off immediately, but I have yet to be disappointed over the long term.

I once overheard someone compare buying a fund or stock when it looks the worst to cliff diving. In order to not smash themselves against the rocks below, cliff divers have to have the courage and conviction to dive when the waves have receded and they only see rocks below them. By the time they get down to the rocks, the waves have rushed back in and they safely hit the water.

It takes courage and conviction to buy a fund or stock when it looks the worst. But, assuming you have done the necessary research in advance, this can be the best time to buy.