What is the worst Investment advice you have ever heard?
Here's a short story from a conversation that I had last week about investing.
I was talking to a friend in his late-20s about investing and explaining to him about why he should consider moving away from his high fee mutual funds at the bank to a portfolio of low-cost Index ETFs or a robo-advisor. You can check out my blog to see my articles about the high fees and the my recommended passive portfolios.
The simple strategy that I was discussing was a passive type portfolio similar to this:
25% US Equity Index ETF
25% Canadian Equity Index ETF
25% International Equity Index ETF
25% Fixed Income Index ETF
I had explained that when I do my financial projections with this type of portfolio, I use an expected future return of 6% per year (per FPSC assumption guidelines).
At this point, an acquaintance of ours sits beside us and enters our conversation. Having seen what I was recommending, he asked very confidently,
"Why would anyone want to invest in a portfolio of Index ETFs if the expected return is only 6% per year? Why wouldn't you invest in a 30-year Government of Canada strip Bond that will yield 6% per year RISK FREE!!!"
I didn't really have an answer him because I'm not familiar with strip bond prices but I was pretty sure they weren't yielding 6% per year. As I wasn't sure about the rate (and said I would verify it), I did point out some cons of his investment recommendation.
1) Interest rate risk: As interest rate risks rise over the next 30 years, a strip bond like this should decrease in value unless held to maturity. His answer was in agreement that yes you would have to hold until maturity (30 years).
2) Liquidity risk: As per the above point, if you want to get the 6% annual yield out of the strip-bond, you would have to hold until maturity, so effectively you are 'locking' your money in for 30 years. So my friend in his late-20s would have to be sure he wouldn't need the money to buy a house, fund a large purchase, or retire early etc...
After some good discussion about this acquaintance's strategy, I went home to think about his investment recommendation directed to a guy in his late 20s. I went online to the Bank of Canada website to verify his claim that he could get a 6% yield on a Government of Canada 30-year strip bond which I was pretty sure didn't exist. I downloaded the Zero-coupon yield curve and............
A 30-year Government of Canada Strip Bond is currently paying an interest of.......2.48% per year, NOT 6% per year!!!
I'm sure our acquaintance friend was just a bit mixed up on numbers and I am giving him the benefit of the doubt but seriously, this may well go down as the worst investment advice I have ever heard.
Telling a guy in his late-20s to invest in a 30-year Government of Canada Strip Bond that pays 6% per year (which doesn't exist, it really is 2.48%) and HOLD it for 30 years without selling to mitigate interest rate risk is pretty terrible.....
This story illustrates that if someone tries to offer investment advice that is too good to be true, even if they are extremely confident in the recommendation, you should really step back and do your own research or talk to a professional about it.
What is the worst investment advice you've ever been given?