Based on conversations I've had with investors and their financial advisers, investment performance hasn't lived up to expectations. This isn't just a symptom of the 2007 to 2009 bear market; I'd been hearing stories of disappointment for years prior to the crash. And it's not merely anecdotal.
From late 1993 through mid-2008, I estimate that Canadian mutual fund investors experienced returns of 5.6 per cent annually - about 1 per cent a year more than GICs. Fetching an extra 1 per cent a year is not chump change, but it's not up to scratch. Investing is inherently uncertain. Investing successfully, however, is about tilting the odds in your favour. These tips can help you do just that, regardless of your preferred investment vehicle.
Write down your goals
Document your goals in the context of time - for example, short-term, medium-term and long-term. Even better, schedule a periodic review to assess your progress. Finally, it's ideal to involve another person in this process, such as a trusted friend or adviser. Each step creates increasing accountability, which boosts your chance of success.
When working with a financial adviser, this statement of goals should be part of an Investment Policy Statement. The IPS's size need not rival the phone book; it should be succinct.
Keep your portfolio focused
Diversifying is important but it can be overdone. Gimmicky investments are easily collected - like stamps - but that's a recipe for disaster. Force yourself to articulate why you're buying an investment and what role it plays in moving you toward your goals. Your justification should extend beyond last year's sizzling performance and be as forward-looking as possible.
In my experience, investors who hold stocks tend to be too concentrated by company and industry. This can work well but it can also lead to disastrous results. It's sure to result in very deep up-and-down swings in value.
Ironically, mutual fund investors have the opposite problem. For instance, fearing that their first Canadian stock fund pick won't work out as expected, investors often will hedge their bet by buying a second or third Canadian fund - figuring that at least one will outperform. Dividing your money too thinly across too many funds dilutes the potential for portfolio outperformance.
Holding as few as three funds or as many as eight should be sufficient to nicely cover all asset classes.
Focus on your portfolio
While it's important to monitor each part of your portfolio, performance monitoring should focus on the total. If you've chosen investments that don't all move in tandem, you'll always be holding something that is in a slump.
For example, you may look at your U.S. and foreign stock funds or ETFs today and be tempted to shift that money into something that's doing better now. While understandable, this reaction is short-sighted and unduly influenced by the last the five to 10 years. Basing decisions on recent performance is partly behind investors' mediocre long-term performance.
Similarly, you might see stocks like Manulife or BP among your funds' top holdings. Before concluding that your fund manager lacks skill, understand that the most talented investors will get 40 per cent of their stock picks wrong. It's also worth understanding when and why your funds bought those struggling companies, and the manager's current thinking.
Keep an eye on fees
Fees are undoubtedly important. For more conservative investors, fees will weigh more heavily on long-term returns. While fees are less vital for more aggressive investors, awareness of what you pay is essential so that they remain at reasonable levels. But be warned: You can't expect rock-bottom fees if you need or want advice. If you're a do-it-yourselfer, watch out for trading costs that can destroy performance in stealth-like fashion.
Treat your portfolio like soap
The more you "touch" your portfolio, the smaller it tends to get. That's the conclusion reached by Brad Barber and Terrence Odean, even before the last two bear markets and the ascent of online trading. Since then, it's become much easier to buy and sell stocks, mutual funds and exchange-traded funds online.
And I would bet that trading frequency has soared since the Barber and Odean research paper in 2000. This doesn't mean that you should espouse a "buy and snooze" approach to investing. But revisiting your written goals or IPS and making decisions in the context of your periodic reviews will force you to come up with substantive reasons for making changes.
My advice is easier said than done. But developing an awareness of these tips can help you to begin changing performance-detracting behaviour.
Dan Hallett, CFA, CFP, is director of asset management for HighView Financial Group and a contributor to thewealthsteward.com
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