Investing for beginners, part two

October 10 2007 by Ellen Roseman

Some people save enough to retire at an early age and do it without the help of a financial adviser. That’s the life lesson taught by Derek Foster, the Ottawa man who built a portfolio of $400,000 or so, less than half of what many financial advisers think you need to quit work. He’s 37 and left the full-time work force three years ago, staying home with his wife and four kids. Meanwhile, he’s writing and publishing books, Stop Working and The Lazy Investor, to help others follow his strategy.

Foster came to my investing class last week to talk about his philosophy. He believes in buying high-yield stocks in stable, recession-proof businesses, companies that are mature and that increase their dividends regularly to help you keep up with inflation. He uses margin to juice his returns. He holds for long periods and doesn’t pay attention to what the markets are doing. He has no RRSP, preferring to pay taxes on his investments today, instead of down the road. He doesn’t diversify overseas and buys only in Canada and the United States. He doesn’t diversify by sector and just buys companies he likes.

I don’t agree with much of what he says, but I can’t argue with success. His portfolio is growing and he lives on the income it generates. With no debt and a paid-off house, he can always put on a new mortgage if stocks go down and he gets a margin call. He’s given each of his kids $8,500 for a higher education fund and he’s managing the money until they’re old enough to take over. If they want more for university, they’ll have to earn it.

Foster is an engaging personality and enthusiastic speaker. The students liked hearing his story and asked lots of questions. It’s always inspiring to hear from someone who works hard to reach a goal, which in his case was leading a leisurely life outside of the daily rat race.

For many of us, however, it’s scary to follow our hunches and invest on our own. We may never get beyond a high-interest savings account or guaranteed investment certificate without a financial adviser. So, we have to know how to find good advice and avoid the “snakes in suits,” whose interests are not aligned with our interests.

In my class, I emphasize the importance of the new client account form. This is a document that must be signed at the start of a relationship, setting out your level of experience, investment knowledge and risk tolerance. It will be used as evidence in a dispute, so it has to be filled out properly.

Here’s a good booklet to read, published by the Canadian Securities Regulators, called Choosing Your Financial Adviser. On page 10, it says:

Before you sign the form, make sure that everything in it is correct. Errors in the form may lead to inappropriate advice and may erode the legal protections you are entitled to if something goes wrong. Get a copy of the form and keep it with your account records.

If you want to stay out of trouble with an adviser, take this advice. Find the form, keep it in a safe spot and refer to it often. Later, if your life changes or your investing style shifts, read it again and revise it, if necessary. It’s an important piece of paper. Treat it with the respect it deserves.

1 comment

  1. Brian Poncelet, CFP

    Oct 24 2007

    Hello Ellen,

    The big thing is the risk tolerance, people think they can handle the ups and downs of the market but most can’t!

    Make sure the funds match your risk tolerence. Look at the worst years how far down did it go? Has there been a fund manger change? Sometimes change is good sometimes not.

    Also, the market has done well for years. Going forward the market may be ready to go down, or produce poor returns for years! Always look at least five to ten years as your holding period.

    Hope this helps some people.

    regards,

    Brian Poncelet, CFP