November is financial literacy month; an opportunity to not only educate Canadians on the basics of money management but to dispel long-held money myths. With the help of some colleagues at BNN Bloomberg, here are six common investment myths.
 
1. The stock market is crapshoot
 
The global stock market is huge and unpredictable, and many aspects of it can be a crapshoot for the novice investor. But stock prices on the major indices at any given time generally boil down to what investors believe are the earnings potential of the underlying companies. Earnings, also know as profit, are derived by subtracting the company’s costs from the amount of revenue or sales it brings in. 
 
It’s the same basic principle for a multinational corporation or a hot dog stand. 
 
High share prices in relation to earnings usually reflect a belief in a company’s potential to grow earnings either by increasing revenue, cutting costs, or both.
 
Unlike a crapshoot, investors can manage risk by researching a company’s earnings and potential for earnings growth through regular financial statements to determine if the market is undervaluing a stock they want to buy, or overvaluing a stock they want to sell.
 
2. Markets always go up
 
Major global stock indices have gone up since the Great Depression but there have been peaks and valleys. Younger investors might be lulled into a false sense of security because equity markets have been charging ahead since the 2008 meltdown when the bigger indices lost up to half of their value in a matter of months as the global financial crisis played out.
 
There have been other short shocks including the 2020 pandemic selloff that ended with markets climbing to new highs, but there was a period in the 1970s when they traded flat for years.     
 
3. RRSP contributions are tax-free
 
Canadians love their registered retirement saving plans because contributions can reap a tasty tax refund. What they may not fully understand is that all those contributions, and any gains they generate in RRSP investments over time, are fully taxed when they are withdrawn. That’s why it’s important to plan ahead and ensure the cash is withdrawn at a low marginal tax rate; ideally in retirement. 
 
Over-contributing and strong investment growth could put you in a situation where the government will force you to make minimum withdrawals at a high marginal rate.
 
4. There is no connection between investing and debt
 
Paying a low-interest mortgage and investing at the same time can make sense because the potential for investment gains, combined with tax savings from an RRSP or a tax-free savings account (TFSA), could conceivably exceed interest costs on the mortgage. 
 
However, when interest rates on unsecured debt start creeping up to the high single digits, and even high 20 per cent range for balances on credit cards, the case for also investing collapses. There’s no such thing as a guaranteed return of ten per cent on an investment, but there is if you pay down debt at ten per cent.  
 
5. Dividends are money in the bank
 
Dividends are paid at the discretion of a company’s board of directors. The big Canadian banks have never failed to make a dividend payout, but many TSX-listed companies have had to suspend or cancel them for a number of reasons.
 
6. One good trade makes you Master of the Universe
 
Investing can really mess with your head. Just like gambling, human nature makes us remember the wins and forget the losses.
 
Getting it right once does not make you smarter than everyone else. Be humble and proceed with caution.