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Investing Without a Plan


I swear to God, some people walk into a bank thinking it is a McDonald’s!

A colleague of mine walked into my office the other day with her eyes so big they were ready to pop out of their sockets.

“Have you seen this? ING is offering 3% (annualized rate) for the next 3 months on an RRSP contribution! This is way more than what we offer!” she said, panicked by the thought of losing accounts to the big orange online monster.

“So what?” I replied almost as interested by her announcement as I was when they said there were going to add a bus line on Sunday morning.

“How can I compete with this? The Bank won’t budge on their GIC rates and we are so far away from this offer!” she insisted (that’s it, I think her eyes dropped from her head and started some break dancing on my desk).

“Do you know that if your client invests $5,000 for 3 months at a 3% rate (annualized) he will make about $35? How can you not compete with a huge profit of $35? What is your client going to do in 3 months since he will only retire in 30 years?”. I knew the answer: he will transform himself into another rat (i.e. rate shopper [2]!). But the key is that he won’t get much from jumpin’ from one rate to another (especially with the marvellous rates we have in the industry!).

Unfortunately, some people prefer to see financial advisors as trustworthy as mechanics or politicians. Therefore, they prefer to trust themselves and invest in something they understand. 3%. That, they understand. They don’t figure it’s only for 3 months and that they won’t do much after this period. They understand the 3% concept and they are happy with it.

The key point is not to manipulate our clients and make them invest in something else. The point is to help them understand that they are losing their time and most importantly their money chasing ridiculous rates for 3 months when they won’t be touching this money for the next 30 years.

Each investor should have a plan. He should know how much he invests, where he invests and (most importantly) why he does it this way. If you are investing without knowing the answers to those 3 questions, you are not investing in the right way. Then, you are in serious trouble and I hope you are putting a lot of money aside because you won’t make it to retirement…

Notice that I didn’t talk about how much you will make. This question is useless as nobody knows the real answer. However, if you stay invested during the next 30 years, you should be making around 4 to 6% depending on your investor profile [3]. In any case, it will be better than investing in GIC’s!

I have living examples to prove it: I had looked at one of my clients who invested his money in an investment strategy back in 2004. As of the end of 2009, he was making an annualized return of 5.13% (with a balanced fund). While he was making more than any 5 year GIC back in 2004 (they were giving about 4.50% to 4.75%), it was also tax efficient and liquid at any time. In addition to that, we have to mention that his portfolio went through the worst investing period of all time. Therefore, I am ready to bet that he will be making much more than 5% annualized rate at the end of 2010 while the other individual will have to renew his money at 3% for 3 months…and then… 3% for the next 5 years?

Next time you see an investment promotion, don’t ask yourself if it’s a good deal or not, ask yourself if it fits your investing strategy or not 😉

image source: Beau B [4]

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5 Comments To "Investing Without a Plan"

#1 Comment By Ken On February 22, 2010 @ 11:08 am

Very well put. Good investors think long term about their money. Chasing whims will never bring what you want. Having a plan for each investment you make is FAR MORE important than getting a short term cheap thrill. Good post!

#2 Comment By The Rat On February 22, 2010 @ 9:33 pm

Well said. Just because we here the hoopla for RRSP season coming to a close, it might not be a good idea to invest for everyone, and as you mention, it has to fit your investing strategy.

Nice thread.

#3 Comment By youngandthrifty On February 22, 2010 @ 10:12 pm

LOL that’s a hilarious picture. =) PMS…

Great post (and accompanying picture). Some people get so blindsided by the numbers, especially on the TFSA’s. 3% on for a few months $5000 really isn’t very much! Besides, there’s not guarantee how long that rate will hold anyways, right (don’t foresee it to stick like that past three months, IMO).

#4 Comment By The Rat On February 22, 2010 @ 10:21 pm

Yeah…that pic is nuts! LOL

#5 Pingback By Intelligent Speculator | Financial Ramblings On February 27, 2010 @ 8:10 pm

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