A client sent me a website address recently. It promised to be one of the best tax shelters. She asked me to evaluate the information and give my opinion. The website advocated using universal life insurance as a tax shelter to ensure that neither during or after the investment would any tax be paid. It also mentioned the strategy of leveraging (more on that later) as a means of tax avoidance.
The information on the website had enough factual errors to damage the credibility of the idea it was presenting. The most obvious of the mistakes was that the home page ended with a quote from former Finance Minister GARTH Turner. Now some of you know that I am in my mid forties so I have been around long enough to know that JOHN not GARTH Turner was Finance Minister. If I am wrong please someone let me know and you readers can punish
Thank you Janna for asking me to check this one out. Is this how a bloodhound feels on the scent of a trail? As one of my clients commented when replying to the question on investing from the survey: “That’s what I have you for.” Please know your questions are welcome. Don’t get me wrong I would be glad to say an investment is a good idea. However there are many dubious and questionable investments both past and present. In fact there are enough around that the public rightly regards the financial field with suspicion and distrust. Yet ironically many of the investing public still gets burned by scams. Do any of these names sound familiar? Overseas Mutual Fund, Bre-X, The Principal Group, Visual Labs, Jerry White(UltimateWealth).
The promoters of these “investments” take advantage of these characteristics of human nature: fear, worry, greed, and impatience.
People don’t like to pay taxes. They worry they aren’t saving enough for their retirement if they are in their boomer years. They want to get out of debt tomorrow. They want to get a 25% guaranteed return in 6 months or sooner. Sometimes they believe that the only route to financial independence is to take a drastic detour down an unknown street. By the way I know that is none of you, but those people may be your friends.
Remember the word risk from a few issues ago? As you recall the term risk is often used when people really mean volatility. The true meaning of risk is the probability of the person being harmed when taking a certain action. For example risk is going without a helmet or not wearing a seatbelt when biking or driving on the Deerfoot.
Leveraging in investing is often risky. Leveraging involves borrowing money to invest. At the very latest repayment must occur after a return on investment has been made. In many cases the investment has not done well enough for the borrower to repay the loan. That is true risk, and any good financial planner would recommend leveraging in only a few situations. Yet clients have told me that they or people they know are still pressured to take on this risk. Enough of these cases have come to a bad conclusion that Canadian regulators are now scrutinizing leveraging with a high powered microscope. It is not fun to have to sell your house to repay a dot.bomb gone bad.
I cannot stress strongly enough that a financial plan takes time. Taking on more risk is not a substitute for time.
What are some red flags that might point to the ‘danger zone’ in investing?
The promoter tells you that many people have made a lot of money on the idea. I know a couple who lost every last dollar invested on an offshore scheme with that promise.
- The words guaranteed or secure especially if it is accompanied by a promise of a return of more than single digits.
- The words tax free, tax shelter, high returns, find out the secrets the general public doesn’t know.
- If the promoter is very persuasive and wants you to invest right away.
Remember how in Issue #2 I used the analogy of a house for financial planning? Promoters of investing ideas always focus on the investing room as the answer to all of peoples’ financial wishes and woes. They ignore all the other rooms. Investments will not make up for careless spending, budgeting, or ballooning debt. I know that is none of you dear readers but you may know people in those situations.
A related corollary is the popularity of legitimate investments in the stock market.
Sometimes the publicity surrounding any particular investment will be the only reason people buy it. They don’t realize it consciously, but they figure it must be good if so many people are in it too. The media does not help either. An investment’s increased popularity will drive up the price. The increased demand will lead to a supply shortage pushing up the price even further. At prices in the hundreds of dollars per share investors should stop to ask: Is this investment worth $287/share? In hindsight the answer is almost always no. Think of Nortel Networks, Enron, and Worldcom.
Popularity in itself is not a good gauge of the worth of any investment. What goes up must almost always come down. Unlike the Drop of Fear at the Stampede the thrill is not in the descent. In a lot of cases the safest and most profitable action is to do the opposite of the fashion of the month.
Here are the results of the survey. Thank you to all readers who replied, especially to those that took the time to include comments. The winner of a Future Shop gift certificate was the Dow family.
All respondents found the newsletter interesting and useful. There were more 4s than 5s which I interpret to mean the newsletter content needs to be fine tuned to achieve an excellent standard.
Most respondents found the frequency and length good. A few did want it to be longer.
The most popular topics were: budgeting, personal money management, taxation, investing, and using credit.
Readers like the fact that the newsletter content is understandable and written in non technical English. After reading the Income Tax Act I solemnly promise not to use run on sentences. Most of the sentences I read there were at least a paragraph long. I look forward to the day I can buttonhole the author of the Act in a dark alley and ask him/her: “What’s the big idea using sentences with 20 commas each?” As one reader said:” I like the newsletter because it is clear and to the point.”
PS The acknowledgement for the cow story was supposed to appear in the body of the last newsletter. Thank you Fidelity Investments.