The industry has itself been guilty of perpetuating certain misconceptions
With Canada commemorating Financial Literacy Month this November, the important role that advisors play in furthering their clients’ understanding of investments is under the spotlight.
In an interview with BNN, industry expert Dale Jackson said the investment space itself has perpetuated misconceptions and myths that are already proven false. He started with the belief that past returns indicate future returns.
Jackson explained that investment firms have the habit of bragging about their past returns when in fact, some failed to sustain their growth momentum.
Also Read: Canadian youth shine at financial literacy
Citing a recent Wall Street Journal investigation, Jackson pointed to the Morningstar mutual fund ratings. He said the highest rated mutual funds have actually floundered over the past 15 years.
"Fund managers can dress up or goose their performance when it makes them look good. In the case of value funds that seek out good companies that are beaten down, it might be the bad performers you should be looking at," Jackson said.
Another commonly held belief that Jackson discussed was that higher fees translate to a better performance. In most cases, the opposite is true, he said.
Meanwhile, investors should stop believing that mutual funds are a rip-off. Underwhelming turnover from average mutual funds does not mean others are underperforming as well. Jackson stressed that there are many mutual funds that are rocking the benchmarks.
"Long-term annual returns can vary by double-digit percentages. Investors who put their trust, and money, in good management are often rewarded," he said.
Lastly, Jackson debunked the age-old myth of having to borrow in order to invest. “In reality, compounding works both ways. Debt eats away at returns,” he explained. “The big difference is; paying down debt at ten percent is a risk-free return. Making ten percent on an investment is not a sure thing. It’s often better to invest in your debt."
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In an interview with BNN, industry expert Dale Jackson said the investment space itself has perpetuated misconceptions and myths that are already proven false. He started with the belief that past returns indicate future returns.
Jackson explained that investment firms have the habit of bragging about their past returns when in fact, some failed to sustain their growth momentum.
Also Read: Canadian youth shine at financial literacy
Citing a recent Wall Street Journal investigation, Jackson pointed to the Morningstar mutual fund ratings. He said the highest rated mutual funds have actually floundered over the past 15 years.
"Fund managers can dress up or goose their performance when it makes them look good. In the case of value funds that seek out good companies that are beaten down, it might be the bad performers you should be looking at," Jackson said.
Another commonly held belief that Jackson discussed was that higher fees translate to a better performance. In most cases, the opposite is true, he said.
Meanwhile, investors should stop believing that mutual funds are a rip-off. Underwhelming turnover from average mutual funds does not mean others are underperforming as well. Jackson stressed that there are many mutual funds that are rocking the benchmarks.
"Long-term annual returns can vary by double-digit percentages. Investors who put their trust, and money, in good management are often rewarded," he said.
Lastly, Jackson debunked the age-old myth of having to borrow in order to invest. “In reality, compounding works both ways. Debt eats away at returns,” he explained. “The big difference is; paying down debt at ten percent is a risk-free return. Making ten percent on an investment is not a sure thing. It’s often better to invest in your debt."
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