Nathan Garries is a CFP with Beyond Business Financial Solutions in Edmonton, Alberta. He provides comprehensive advice through understanding, advocacy, and an ability to take the anxiety out of financial matters.
Interviewer: Would you recommend against using market timing as an investment strategy?
Nathan: Yes, I would. In the financial planning industry, market timing is generally seen as more of an emotional approach, and over time, it hasn’t proven to be effective for most investors. While market timing might work for professional day traders who are constantly analyzing market data and trends, it’s not a practical strategy for the average investor. As a financial planner, my goal is to help clients stay focused on long-term strategies, avoiding the distractions of market noise.
It’s really about “time in the market,” not “timing the market.” Markets are influenced by countless events, and trying to predict each one can often leave you on the losing side. For example, last year many economists predicted a US recession, but that didn’t materialize, and the markets actually performed well into Q4 and Q1 of 2024. This just illustrates how unpredictable the market can be. So, instead of trying to time every rise and fall, I encourage clients to stay invested, remain diversified, and think long term
Interviewer: What are some of the biggest mistakes that a typical equity market investor makes?
Nathan: One of the most common mistakes I see among investors, especially those who are newer, is not rebalancing their portfolios. They tend to stay fully invested, not taking profits when they should, and over time they become overweight in certain positions. This can significantly increase their risk exposure without them realizing it.
Another issue I often notice is poor diversification within the right investment accounts. For example, investors might not understand the tax implications of where they’re holding their assets. If you own U.S. equities that pay dividends, you would want those inside a registered plan to avoid higher taxation. On the other hand, Canadian assets are better suited for a TFSA because other jurisdictions don’t always recognize it as a tax-free vehicle.
Lastly, a big mistake is not properly understanding the risk-to-return of their equities. Just because an equity performed well last year doesn’t mean it will continue to do so in the future. Investors can fall into the trap of chasing past performance, thinking that if an equity did well before, it will keep performing. Unfortunately, that mindset often leads to poor results.
Interviewer: Should investors always “buy the dip” or “buy on the dip”?
Nathan: The concept of “buying the dip” is often oversimplified, as it’s nearly impossible to accurately determine when a market has reached its lowest point until well after the fact—usually 6 to 12 months later. Attempting to time the market can lead to missed opportunities and increased risk. A more prudent approach is to establish a long-term, disciplined investment strategy, where capital is consistently allocated regardless of market volatility. Regular contributions, coupled with reinvestment of dividends, can help smooth out the impact of market fluctuations over time.
That said, during significant market events—such as the financial crisis or COVID-19—it is important to consult with your financial professionals. These moments may provide opportunities to reassess your portfolio and ensure that it aligns with your long-term goals while considering any necessary adjustments
Interviewer: How closely do the equities markets track the health of the overall economy?
Nathan: The equities markets function as forward-looking indicators, meaning they often anticipate economic conditions rather than reflecting them in real-time. For instance, during the 2008 financial crisis, the equities markets began to decline well before the National Bureau of Economic Research officially declared the recession. This anticipatory behavior occurs because investors are pricing in their expectations of future economic performance.
Conversely, the markets may exhibit optimism and rise during periods when the broader economy has not yet fully recovered. A notable example is the early 2000s recovery from the dot-com bubble. The equities markets began to rebound before the economy showed clear signs of improvement, driven by investor confidence and expectations of future growth.
It’s important to recognize that while the equities markets and the overall economy are related, they do not always move in perfect alignment. The markets can be influenced by factors such as investor sentiment, monetary policy, and global events, which might not directly correlate with the current economic data. Thus, while the equities markets often anticipate economic trends, they do not always perfectly mirror the real-time state of the economy.
Interviewer: For Canadian readers, what is your advice for Tax-Free Savings Account (TFSA) contributions?
Nathan: I have three key recommendations for maximizing the benefits of a Tax-Free Savings Account (TFSA):
- Fully Utilize the TFSA: Despite being introduced in 2009, many Canadians are still not leveraging their TFSAs to their full potential. TFSAs are powerful tools for financial planning because they offer tax-free growth and withdrawals, which is a significant advantage over other accounts such as RRSPs or pension plans. It is crucial to contribute to your TFSA regularly and utilize the full contribution limit each year to take full advantage of these benefits.
- Use TFSAs as Investment Vehicles, Not Savings Accounts: A common misconception is to use TFSAs as mere high-interest savings accounts or emergency funds. The primary purpose of a TFSA is to serve as an investment vehicle. To maximize its potential, it should be used to hold a diversified range of investments rather than just cash or low-yield savings.
- Be Mindful of Investment Risks: Investors should exercise caution when selecting investments for their TFSAs. High-risk investments can lead to significant losses, and the implications are twofold: not only do you lose the invested capital, but you also forfeit the contribution room used for that investment. It is essential to build a balanced portfolio within your TFSA to avoid undue risk and protect your contribution room.
Interviewer: How can Canadian investors maximize the benefit of a Registered Retirement Savings Plan (RRSP)?
Nathan: To maximize the benefits of an RRSP, Canadian investors should focus on two primary strategies:
- Understand the Purpose of the RRSP: It’s important to recognize that the advantage of an RRSP goes beyond just receiving a tax refund. The real benefit lies in the tax-deferred growth of the investments. To make the most of this, you need to integrate your RRSP contributions into a comprehensive financial plan. This involves assessing your future income potential and expected tax rates. By strategically using other tax-deferred accounts, such as TFSAs and first home savings plans, alongside your RRSP, you can enhance your overall tax strategy. The key is to grow your RRSP assets and then withdraw them when you are in a lower tax bracket, thus optimizing the tax benefits.
- Diversify Your Retirement Income Sources: Avoid relying solely on your RRSP for retirement income. An overreliance can create challenges, particularly with the mandatory minimum withdrawal rules which might force you to withdraw more than you need. This can limit your flexibility and affect your retirement planning. Instead, aim to diversify your sources of retirement income to maintain financial flexibility and manage withdrawals more effectively.
Interviewer: How important is it for a family to start investing early?
Nathan: Investing early is fundamentally important and can significantly impact long-term financial outcomes. The core principle here is the time value of money, which highlights the advantages of starting investments sooner rather than later.
To illustrate, consider an individual who begins investing $6,000 annually at the age of 18. Assuming a reasonable rate of return, this investment could grow to approximately $1.4 million by the time they reach 60, thanks to the effects of compound interest. Conversely, if the same individual delays investing until age 25, the accumulated value at age 60 might be only about half of that amount.
This example underscores the substantial benefit of early investment. Compound interest allows for growth not only on the initial principal but also on the accumulated returns over time. Starting to invest early leverages this compounding effect, providing a significant advantage in building wealth and achieving financial goals over the long term.
Interviewer: What are some of the ways investors can diversify their portfolios?
Nathan: Effective portfolio diversification involves several key strategies to manage risk and enhance potential returns. Here are three primary approaches:
- Geographic Diversification: It’s essential to expand beyond domestic markets and include international investments. For instance, by diversifying into markets such as North America, Europe, and Asia, investors can reduce the risk associated with economic downturns in any single country. For example, if the U.S. market faces a recession, investments in Asian markets may still perform well due to differing economic conditions.
- Professional Management: Engaging with investment managers who specialize in specific regions or asset classes can enhance portfolio performance. For instance, if you are investing in European equities, partnering with a fund manager based in Europe who has a deep understanding of local market trends and economic conditions can provide valuable insights and improve investment outcomes. Similarly, for emerging markets like India or Brazil, having managers with local expertise can lead to more informed investment decisions.
- Asset Class Diversification: Diversifying across various asset classes—such as equities, fixed income, real estate, and alternative investments—can further spread risk. Equities offer growth potential but come with higher volatility, while fixed income investments, like government or corporate bonds, provide stability and income. Including real estate investments can offer additional diversification and potential returns. Additionally, alternative investments, such as private equity or infrastructure projects, can provide further diversification and potentially enhance returns by accessing different types of assets not correlated with traditional investments.
By incorporating these strategies, investors can build a well-rounded portfolio that manages risk effectively and takes advantage of a broad range of growth opportunities.
