Expert advice: Simplify your finances
When it comes to knowing what to invest, in where to invest it and for how long, many Canadians feel frustrated and fearful. So says Alison Griffiths, Toronto Star personal finance columnist, and author of "Count on Yourself: Take Charge of Your Money."
Griffiths examined dozens of investment portfolios for her column; regardless of their size, most contained far too many mutual funds, carried excessive risk, held few quality products and were producing a low rate of return.
The single biggest problem? "Their financial lives were far too complicated," she writes.
To simplify, you have to know exactly what you own, where it is and what it's costing (or earning) you. Griffiths advises readers to create a written inventory of every financial commitment they've made, from pet insurance to overdraft protection to your children's bank accounts. Until you know exactly where your money is going, you can't effectively reduce and simplify, she argues.
If, like Griffiths herself, you're also helping an older parent with their finances, you've likely got another 15 or 20 items to consider.
Creating the inventory begins an essential, common sense three-step process: clarify, simplify and protect. A current inventory (and remember to update it frequently) will also help anyone who must suddenly take over your financial affairs, as happened to Griffiths when she landed in the hospital, leaving her husband in charge of their financial affairs. Reading over that list can immediately make clear how tangled, and needlessly so, your finances may have become.
Her motto is the classic KISS: Keep It Super Simple.
Clarity also matters as you trim your portfolio and other commitments. You need to know what fees you're paying and whether they're worth it, she insists. And that's complicated and challenging enough to determine.
"When you don't know the fees, let alone what performance those fees have been purchasing, you are investing blindfolded," she writes. In 2010, DALBAR, a U.S.-based investment research firm, found that only 23 percent of Canadian mutual fund companies displayed the rate of return on their statements and only 6 percent of brokerage statements offered that information.
Griffiths urges investors to consider the simplicity of exchange-traded funds, preferring ETF's low management fees and lack of sales commissions, which tend to seriously erode mutual fund performance. She also suggests buying one large-cap and one American large-cap as part of a diversified portfolio.
Canadians tend to be more passive, reluctant to question and challenge those they assume have greater knowledge and power of their finances than they do, she said in an interview.
If you don't understand what your financial adviser is telling you, insist they explain it in a simpler fashion, or find someone else who will. "All the bafflegab, acronyms and complex terms only benefit an industry that profits from our confusion," she says.
"We've also been bamboozled by the financial services industry in such a paternalistic way," she says. "It's like being on the operating table and having the surgeon hand you a scalpel and asking you to make the first cut."
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