Someone I know asked me for my thoughts recently on the subject of their retirement investments. We agreed I could share my response here, with some edits.
The question:
“Like everyone else, I am losing money in my RRSPs. In my mutual funds, I’ve lost a good chunk. But when I talked to the guy at the bank, he said to keep it in and wait. I asked him how much do I stand to lose and he said, theoretically, all of it, but it’s invested in sound companies, so I should wait it out. Do you think he’s giving me the correct advice?”
My response:
The advice is generally sound. Selling when prices are low is the opposite of what one generally ought to do. In fact, there is an entire field called “behavioural finance” or “behavioural economics” which studies the mistakes people make when it comes to money.
For instance, let’s say prices at the supermarket on canned goods were 50% off. You’d be loading up! Whereas, if prices were double what they were normally, you’d pass. Unfortunately, people tend to look at investments the other way around, and do the buying when they ought to be selling, and do the selling when they ought to be buying.
You may be interested in reading more about behavioural economics. One book I enjoyed is Why Smart People Make Big Money Mistakes and How to Correct Them. It’s a very approachable book, and the advice is practical and will save you money and headaches. Note: The book isn’t specific to investing, but it highlights how people often make the wrong choices when it comes to money. It relates to psychology.
Also, it’s important I clarify one thing: I wrote “generally sound” above as there are obviously exceptions to the advice of staying the course that depend on context. For instance, it is not considered prudent to have money invested in the stock market if the money is needed during the next five years. So, if you’re referring to short term money needed for a specific purpose soon, then getting out is not a bad idea. A better place for shorter term funds may be a bank account or a term deposit.
However, if the money is truly invested for the long term, then staying the course is a good approach, and investing more at these prices is also attractive.
But, I’m not a fan of most mutual funds, and those offered by banks in particular, due to their high fees. Do try and ensure your money is invested in a diversified portfolio of low-cost index funds. My favorite investing approach is described in The Four Pillars of Investing. I often mention The Four Pillars when people ask me about their investments. It’s fantastic. By the way, one of the Four Pillars of Investing is psychology.
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