Gail Bebee is the author of No Hype – The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com. This is part eight of a 12-part series for people that are new to investing on their own.
I’ve been investing on my own for about 10 years now. In that time I’ve made my share of investing mistakes. I think I’ve learned a thing or two from my misadventures. In the interest of helping readers avoid some of the dumb, and not so dumb but unsuccessful, things I have done, this article recount some of my mistakes, and more importantly the lessons I have learned in the Investing School of Hard Knocks.
About 10 years ago, Labour Sponsored Investment Funds (LSIF) were very popular. The tax treatment of qualifying LSIFs was enticing: 15 per cent tax credit from the federal government, 15 per cent tax credit from most provincial governments plus a 5 per cent Ontario tax credit for research-oriented LSIFs.
Mesmerized by the substantial tax savings, I bought the Canadian Medical Discoveries Fund, an LSIF which invested in medical research companies and qualified for all the tax breaks. What I didn’t pay enough attention to was what the fund invested in — small and micro-cap Canadian companies involved in medical research.
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I was effectively signing up to be a venture capitalist, not the best bailiwick for a retail investor. I also didn’t check what I would be paying the fund company to manage the fund. Looking back, I am astounded to discover that the management expense ratio was over 5 per cent, much higher than the 2-2.5 per cent of the average Canadian equity fund at the time. Even worse, I bought this in my RRSP and could not use any tax loss to reduce any capital gains I had made in my regular account.
Fast forward eight years, when the investment could be sold without losing the tax breaks: the fund price was worth less than half my initial outlay and was continuing to fall. Even worse, fund redemptions were restricted because investors were bailing out as soon as the tax benefits crystallized. As well, the Ontario government decided to ratchet down the tax credits, effectively shutting down the flow of new money into LSIFs.
So many mistakes in just one investment! Here are the lessons other investors should learn from my foray into LSIFs:
• Understand what you are buying.
• Avoid funds with high fees.
• Buy the investment, not the tax treatment.
• Don’t put high-risk investments in your RRSP.
