It is best to hold a diversified portfolio of stocks, bonds and cash within the RRSP and stay away from investments that are risky or very expensive. Here are some investments you may want to avoid:
Venture Capital Funds: Even with the tax kickbacks, Labour-Sponsored Investment Funds are poor investments. The long list of negatives includes sky-high MERs, very poor track record, opaque pricing of underlying investments and long holding periods.
Bullion Funds: Precious metals have been on a tear in the past few years and sure enough investors are piling on to them. While some experts recommend a 5% allocation, gold and other precious metals, at best, keep pace with inflation if storage and insurance costs are ignored. Ask yourself if you really want to hold something that provides less than a 0% real return over the long-term.
Principle-Protected Notes: Tom Bradley has a series of columns (available here, here, here and here) in his SteadyHand blog that you should read if you are considering PPNs. Essentially, principle protection is a dubious benefit with costs involved that ultimately comes out of your pocket.
Sector Funds: Almost always sector funds become hot sellers when a trend is near its peak. During the bubble, investors couldn’t get enough of the technology or telecom funds and these days it is resources, energy, oil sands and BRICs. Even ETFs are not immune from the sector-fund mania but investors are almost always better served just sticking with broad-based equity fund.
In your opinion, are there other investments that average investors should stay away from?
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4 responses so far ↓
1 Canadian Capitalist // Feb 15, 2007 at 12:15 am
I should have added hedge funds, segregated funds and wrap accounts to the list.
2 traineeinvestor // Feb 15, 2007 at 3:48 am
I would add anything with the word “insurance” in its description or which adds an extra layer of fees.
While I take your point on gold bullion, there have been articles written which claim that including some commodities in a portfolio can reduce risk without having an adverse impact on returns. Also, I view silver as an industrial commodity these days (and not the monetary metal it once was) which makes it a rather different metal from gold.
On hedge funds (a term which covers a wide range of fund strategies), while I generally agree with what you say, the growing number of hedge funds together with the increasing sophistication of investors may eventually lead to a situation where we see well managed hedge funds that offer lower cost structures than we commonly see today. If that happens, then it may be possible to reduce volatility/risk in a portfolio by including some hedge funds that show low correlation with market movements. So while I am not comfortable including hedge funds in my portfolio today, it is possible that this may change at some point in the future. (That said, I am not holding my breath.)
3 Big Cajun Man // Feb 15, 2007 at 1:14 pm
Well not including Insurance might imply don’t buy stock in Insurance Companies, which I think is a good place to put money.
I was thinking about publishing my portfolio and calling it the “Don’t buy these Equities” fund, that way folks at least have a hint about what not to buy.
–C8j
4 Dave B // Feb 15, 2007 at 4:40 pm
Though I agree with most of the items listed, I do not agree with the Sector Investing. On the surface, it may seem risky, but some sector funds actually have quite low risk because they are still diversified geographically and between small, medium, and large caps as well as growth and value.
I think that you may be painting Sector ETF’s with the same “Don’t chase the hottest fund” brush. It IS all about risk and reward, but don’t assume all Sector ETF’s are high risk. There are some that continue to give high yielda at low risk (e.g., XFN).
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