Your Complete Guide to Index Investing with Dan Bortolotti

Are Investors Really This Clueless?

2015-12-07T14:22:28+00:00May 7th, 2013|Categories: Behavioral Finance, Research|25 Comments

Franklin Templeton recently released its 2013 Global Investor Sentiment Survey, which polled 9,518 people from 19 countries. The survey found that 81% of Canadian investors “expressed optimism about reaching their financial goals.” However, many of the other results suggest this optimism may be misplaced.

I want to stress this wasn’t a random survey conducted on street corners, where you would expect some respondents to be oblivious teenagers or people without money to invest. All of them were at least 25 years old and owned a significant amount of stocks, bonds or mutual funds, ensuring they had “a knowledge base from which to answer the survey questions.”

Here’s the first head-slapper: 52% of Canadians in the survey believed the stock market declined or was flat in 2012. In fact, the S&P/TSX Composite was up 7.2% last year. That’s a remarkable lack of awareness that shows how many investors still refuse to believe we’ve been enjoying a bull market for more than four years. Even more amazing, almost a third of US investors also said the market was flat or down in 2012, despite a rip-roaring 16% return for the S&P 500.

Given these misperceptions, it should come as little surprise that many Canadians have soured on stocks. More than half (56%) reported they can meet their investment goals without equities in their portfolio. That swelled to more two-thirds (68%) for those aged 25 to 34, meaning younger Canadians are the most conservative of all age groups. This younger crowd also seems the most pessimistic: only 13% said they expected stocks to outperform other asset classes in 2013, and 59% said they were planning to make their investments more conservative this year.

If this survey is truly representative of Canadian investors, it’s a worrisome combination of overconfidence, ignorance and fear.  There’s nothing wrong with being conservative: indeed, if you’re able to meet your financial goals without taking equity risk, you should probably do so. But that choice needs to be based on accurate information, and if you think stocks went down last year you shouldn’t be making your own financial decisions. If you’re in your 30s and expect to build a retirement nest egg with no equities, you’d better do the math assuming a 2% or 3% return on fixed income investments for the foreseeable future. You might learn you’ll need to save 20% or 25% of your income.


  1. Matt Becker May 7, 2013 at 8:40 am

    Oh wow. Pretty scary numbers. It’s no wonder that Wall St. can trick people into high-priced products when there’s such a lack of understanding.

  2. Mark May 7, 2013 at 9:04 am

    I’m also wondering what these people consider “safe” investments. Is the age cohort considering Real Estate as their safe “investment”?

  3. Elliott Noel May 7, 2013 at 9:54 am

    That’s truly sad. It doesn’t take very much effort to monitor the general movement of the market, either, even if you only look at what’s going on every other month or so.

  4. Elliott Noel May 7, 2013 at 10:08 am

    Mark: I know far too many people who seem to think that buying overpriced and poorly built condos in downtown toronto is the way to go. I can’t help but think that it’s going to end badly for many of them.

  5. Andrew F May 7, 2013 at 10:45 am

    This is exactly why I support an expansion of CPP benefits, or a CPPIB-run DC pension. It’s shocking how much most investors are driven by emotion and headline impressions rather than the actual performance of various asset classes.

  6. Passive Architect May 7, 2013 at 11:53 am

    I’m 32 and I’ve been investing for a few years, only last summer when I stumbled on this site and the Millionaire Teacher’s book that I fully educated myself to the world of investing. I can say that I’m not surprised by the survey results as I’m the only one of my friends I know that actually have money in stocks ( E-series for me). Most people I talk to think stocks are a big risk/ losing investment and have most of their money in simple savings accounts. Very scary. Most barely save for the future. I’m planning on a good retirement so I’ll keep at the couch potato way.

  7. Cybamuse May 7, 2013 at 12:30 pm

    I think believing in the S&P500 etc is a bit misleading. I know that the stocks that make up that index, and maybe other popular US indexes that are up have done well, and if you had invested in ETFs that track them, you obviously profited handsomely.
    However, only a select few stocks make up these indexes relative to the amount listed, and most of those stocks are dividend-paying stocks and people are flooding into them to get some yield a little higher than what the banks are paying.

    However, an awful lot of non-index stocks are being decimated right now. If someone can explain to me how our economy is supposedly recovering while the commodities and commodity stocks are being hammered into below the book value, I’d be most intrigued to hear! If the economy was really recovering, these stocks would be doing well, indicating that there is strong demand for commodities to build things with because we are flush with cash…

    However, for the purposes of the couch potato portfolio, if you invested in the recommended ETFs/mutual funds, which follow the indexes, you probably did indeed do well last year.

  8. Canadian Couch Potato May 7, 2013 at 12:48 pm

    @Passive Architect: Thanks for the insight. I wonder if your friends who are not saving or investing are also confident of reaching their financial goals, like the 81% in this survey. That’s the hardest thing to figure out in all of this.

  9. DC Al Fine May 7, 2013 at 1:01 pm

    Cybamuse, Vanguard’s total stock ETF slightly outperformed it’s S& P 500 ETF in the past year.

  10. Rob May 7, 2013 at 3:43 pm

    Interesting survey. However, I’m not convinced that the blame lies entirely on lay investors. Did the survey indicate how many investors self-direct their portfolio versus invest through a banker or other adviser? My guess is that most invest through their bank or other broker, in which case it is not surprising that they know little about what’s going on or have misconceptions about the markets and reaching their goals. Unless you really follow financial news and actively review your investments, which I don’t think many people do, then it’s reasonable to hold these beliefs: the general outlook from news media about the economy is not very good these days (plant closures; euro debt issues; failed austerity measures; widening income gaps; record consumer debt; etc. – this doesn’t sound like happy times or markets going up).

  11. Nathan May 7, 2013 at 3:45 pm

    One positive interpretation of this would be that people aren’t watching the market’s every move trying to make tactical decisions. In fact, the ideal couch potato would indeed not be able to tell you whether the market went up or down last year, unless they recently rebalanced their portfolio. What’s the point in keeping track of it when at best it will have no effect on your decision-making, and at worst it will cause unneeded anxiety?

  12. Nathan May 7, 2013 at 3:47 pm

    At least, in the early accumulation phase, when you’re simply saving as much as possible. Once you get into the mid-phase, it does make sense to have some idea of what’s happening with your portfolio as it could affect financial planning decisions. Still probably best to ignore it day to day though.

  13. Jin Won Choi May 7, 2013 at 4:42 pm

    Perhaps it’s all a ploy to make other financial advisors’ job easier? “Look, your portfolio returned 4% last year. At least it didn’t go down, like many other portfolios”.

  14. Maxwell C. May 7, 2013 at 7:55 pm

    @Nathan Quite right! I used to check the markets daily…but now rarely do so. I just let my money grow and rebalance as necessary.

  15. Canadian Couch Potato May 7, 2013 at 11:10 pm

    @Rob, Nathan and Maxwell: Fair point. If you have a well thought-out investment plan and make regular contributions to your portfolio it’s not a big deal if you’re unaware of recent performance. That’s even more true if you happen to be working with a good advisor who presumably is a little more aware of what’s happening in the markets. The fear and avoidance of equities is more disturbing.

  16. Death and Taxes May 8, 2013 at 12:34 am

    Warren Buffet may be onto something .

    Be fearful when others are greedy.
    Be greedy when others are fearful.

    The really beautiful thing about the “buy it and forget about it” investing strategy is by its very nature saves one from the trap of over trading which due to commissions can in themselves negatively impact a DIY investors return.

  17. Lin May 8, 2013 at 1:32 pm

    Actually this might be the right place to ask a question that’s been on my mind for a bit. I’m in my thirties and have been investing for a while with mutual funds, but I’ve been reading this site and others and been convinced that I should switch to the passive approach, indexing, etc. Until now, I couldn’t have told you much about my investments due to ignorance, while in the future I’d hope that my investments would passively work without too much attention from me. My question is, though, is there a way to switch from high MER mutual funds to the couch potato portfolio that won’t cause me too much trouble with taxes, e.g. all at once, gradually, or whatever? I did look for this in the site but couldn’t find the question addressed — or maybe it isn’t really a big deal?

  18. Canadian Couch Potato May 8, 2013 at 1:45 pm

    @Lin: Are a lot of your investments in taxable accounts? Many people in their 30s have not maxed out their RRSPs and TFSAs, and if all your investments are in these accounts there are no tax consequences when selling your existing mutual funds and rebuilding your portfolio with lower-cost ETFs or index funds.

    If your funds are in taxable accounts, there’s no way to avoid paying tax on any capital gains, but remember, you were going to have to pay those taxes at some point down the road anyway. And you’ll immediately begin saving a bundle in fees, so it’s an easy decision if you think long-term.

  19. Nathan May 8, 2013 at 2:34 pm

    “If your funds are in taxable accounts, there’s no way to avoid paying tax on any capital gains, but remember, you were going to have to pay those taxes at some point down the road anyway. And you’ll immediately begin saving a bundle in fees, so it’s an easy decision if you think long-term.”

    Yep, although if it’s enough to bump you up a couple tax brackets in the year that you sell, you might consider splitting the sales over two calendar years (some now, some in January). Check out this forum: Lots of smart people there who can help with the specifics of this kind of thing.

  20. Lin May 8, 2013 at 5:31 pm

    @Dan, Nathan, thank you so much, this is really helpful. As you can tell, I am at the beginning stages of trying to figure out what I’m doing so apologies if the question was rather obvious! I’ll check out the forum, looks helpful.

  21. Dave May 9, 2013 at 7:43 am

    As a non-resident Canadian, I do not pay taxes on capital gains. However, the moment I do move back to Canada I begin paying taxes on capital gains from that point (but not retroactive), correct? It is with an international offshore bank.

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  25. Joanne May 13, 2013 at 11:17 pm

    This doesn’t surprise and reflects similar talks I’ve had with friends and acquaintances about money and investing. I’m not an expert and have certainly made my share of money mistakes (oh yea!) but I was given great advice by someone years ago who even then had built a very strong and diverse portfolio, owned their house outright (chose to stay in a modest semi even after many raises afforded a much larger house and lifestyle). Their advice was: don’t take anyone’s word alone when it comes to your money – educate yourself and be aware of what’s going on in the world. Learning about investing and money has become a hobby for me for over a decade but I get not everyone is as excited (I know SHOCK). I’m amazed when I’ve asked others who proudly tell you they save each month in an RSP, mutual funds etc with work or the bank but have NO idea what fees they’re paying and or WHAT they’re invested in! I usually get a blank look. Sadly, it seems too many are just blindly trusting the person or place they sign with and hand over their hard earned money each month. I do suggest they read this and other related blogs and have passed on copies of Wealthy Barber books but is it just me or do others find that sometimes people just want to continue NOT knowing because they’d have to re-think those wants (needs)? I’ve had some head banging moments with those I’ve tried to help and eventually just wished them luck. The next ten years are not going to be pretty for some.

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