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Fireworks light up the sky behind the Peace Tower during a New Year's Eve celebration on Parliament Hill, Saturday, Dec. 31, 2016 in Ottawa. Canada celebrates its 150th anniversary of Confederation in 2017.Justin Tang/The Canadian Press

Investors looking to improve their portfolio performance in 2017 should do as little as possible. I'm not kidding. One of the seminal studies in finance, "The Behaviour of Individual Investors"  by professors at the University of California at Berkeley, studied returns for almost 80,000 discount brokerage portfolios.

It found that, "The 20 per cent of investors who trade most actively earn an annual return net of trading costs of 11.4 per cent. Buy-and-hold investors (i.e., the 20 per cent who trade least actively) earn 18.5 per cent net of costs. The spread in returns is an economically large 7 percentage points per year."

This margin, seven per cent annually, is nothing to sneeze at. Compounded over five years, the differential leads to cumulative outperformance of 22.5 per cent

Transaction costs were part of the reason for the better returns for buy-and-hold investors, but the study also found that extremely active investors were more prone to self-destructive behaviours like selling winners too early.

In part, the poor performance of highly active traders is a lesson in probabilities. Say, for example, that an investor found two stocks which they estimated had a 65-per-cent chance of outperforming the benchmark over their time horizon. Assuming they had correctly assessed the odds, buying one stock gives them a 65-per-cent chance of a successful investment.

To calculate the odds of both stocks outperforming, we multiply the probabilities together so,  0.65 x 0.65 = 0.42. Buying both stocks reduces the odds of success from 65 per cent to 42 per cent, less than a coin toss.

There are, of course, good reasons to sell or buy investments and the ' do as little as possible' advice shouldn't be taken to extremes. But for investors on the fence about new transactions, they should likely sit on their hands.

-- Scott Barlow

Stocks to ponder

Milestone Apartments Real Estate Investment Trust. This security has an unanimous 'buy' call from 12 analysts, writes Jennifer Dowty. The average one-year target price is $22.15, implying the unit price may appreciate by more than 16 per cent over the next 12 months. In 2016, Milestone was amongst the top performing securities in the S&P/TSX composite index real estate sector with its unit price rising over 26 per cent.

Great Canadian Gaming Corp. This is a top performing stock with catalysts in 2017, writes Jennifer Dowty.  It has been a top performer in 2016. The company has a number of potential catalysts that could lift the stock price higher in 2017. The average one-year target price is $28.40, implying the share price may appreciate 15 per cent over the next 12 months. Since November, five analysts have issued research reports on the stock, four analysts have "buy" recommendations and one analyst has a "market perform" or "hold" recommendation. The company has bid on gaming bundles for the Ontario Lottery and Gaming Corp. That announcement is expected in early 2017.

Boralex Inc.  This is a  dividend stock with 10 unanimous buy calls and good growth prospects, writes Jennifer Dowty. If analysts are correct, the stock may appear on the positive breakouts list in 2017. The stock has 10 unanimous 'buy' recommendations, offers shareholders a dividend yield of 3 per cent with dividend growth, and the Street forecasts an average price return of 22 per cent over the next year.

Norbord Inc.  The past few years have been rough on cyclical stocks: mining, materials, forestry and the like. But now things have turned around and some of these stocks were among the best performers in 2016. Norbord Inc. is one of those turnaround companies, writes Gordon Pape. It is a leading producer of oriented strand board (OSB), which is used in home construction and is also more frequently for industrial and commercial building. Its business thrives during periods of strong economic growth, when home building peaks, and suffers when the economy slows and building declines.

BSM Technologies Inc. This cheap TSX stock is a takeover target and eight out of eight analysts say buy, writes Brenda Bouw. Shares of the company, which provides hardware and software for companies in the rail, construction and service sectors, are up more than 70 per cent over the past year. The stock is still off its high of $3.40 in early 2014, but analysts are expecting it to regain some lost ground in the months ahead amid growth in subscribers, revenue and earnings.


The Rundown

Trump's reign over the markets is well under way

The inauguration is weeks away, but investors are already dazzled by the prospect of a gleaming age of growth and fiscal stimulus, writes Tim Shufelt. Canadian stocks rode a confluence of positive forces over the past year as China stabilized, commodity prices rebounded and the Big Six banks delivered another solid year in profits. The net result was a 22-per-cent total return in the S&P/TSX composite index, which amounts to the best performance among major indexes in the developed world by a healthy margin. It is a feat unlikely to be repeated in 2017.

Gold's outlook in 2017 isn't nearly as shiny as other metals

Many long-time skeptics are starting 2017 with surprisingly rosy expectations for metal prices, writes Ian McGugan. Consider Goldman Sachs Group Inc., which in November gave a thumbs-up to raw materials for the first time in four years. The investment bank sees an upswing in manufacturing around the world that will increase demand for many commodities. Here's the catch, though: While more gains may be in store for many raw materials, some metals face obvious threats. Gold, for instance, could feel more pain if the U.S. Federal Reserve follows through on its plan to raise interest rates.

Why oil may only see modest price gains in 2017

The Organization of Petroleum Exporting Countries surprised oil-market veterans in late 2016 with a renewed commitment to limit oil production. Even more surprising was non-OPEC countries agreeing to join the effort, writes Jeffrey Jones. Now comes the hard part – living up to it. A major question mark in oil markets following two years of downturn is how quickly U.S. shale-oil producers will ramp up drilling as oil prices edge up. Both factors could delay the drawdown of a massive glut in crude supplies that still weighs heavily on the market.

What fixed income investors should do in 2017 as bond outlook turns ugly

As 2017 begins, bond investors face a nasty outlook no matter where they turn, writes Ian McGugan. They can pursue the higher yields on offer in the United States, but in doing so, they have to accept the risk that rising rates will hammer the value of their holdings. Alternatively, they can continue to endure dismal yields in Canada and Europe, in hopes that already low rates will fall even further. It's an unusually bleak outlook for an asset class that has enjoyed decades of good returns.

Trump stance on trade to keep loonie under pressure

Canadians became used to their dollar rising and falling in lockstep with oil markets as the energy sector's economic might grew, writes Jeffrey Jones. Now, the loonie could use some of the momentum building in global crude-oil prices. Instead, fears about anti-trade moves emerging in Washington and rising U.S. interest rates have forecasters calling for weakness for the Canadian dollar in 2017.

Why 2017 could be a good year for high-yield bond investors

Safe bonds are out. Risky bonds are in, writes David Berman. As investors anticipate rising U.S. interest rates, stronger economic growth and higher inflation, ultrasafe government bonds have been slumping along with investment-grade corporate bonds. But high-yield bonds are lapping up the improving economic outlook – and these investments should continue to bask in the good times in 2017.

How to make profitable investment decisions in 2017

Scott Barlow takes a look at 10 charts to pay attention to this year as you manage your money. He looks at a variety of issues from oil prices, the value of the TSX, real estate, retail, Trump, financial conditions, the loonie, dividend sectors, exports and more.

Take our New Year's investing and money quiz

How good is your knowledge of investing and money matters? John Heinzl puts you to the test. Take our quiz here.

The stars and dogs of 2016

It was a year when drug stocks got drop-kicked, the Mexican peso got pummelled and the world's biggest athletic shoe and apparel maker just didn't do it, write John Heinzl and Tim Shufelt. But 2016 also had plenty of, er, high points. Marijuana producers left other stocks in a cloud of smoke, and miners unearthed some big gains after years of losses. But you didn't have to be an expert stock picker to win big in 2016. Putting all of your money into an index – whether it was the S&P/TSX composite or the Dow Jones industrial average – would have worked out just fine. As easy as it was to make money, however, there were still plenty of ways to screw up, as the Stars and Dogs of 2016 reveal.

Markets are overshooting reality. It's time to get defensive

Most of the time markets are in sync with economic trends, but occasionally they overshoot reality. We could be seeing that right now, writes Larry Berman. The Canadian and U.S. markets are not quite priced for perfection, but they are not priced for any disappointments, he argues. With the global risks of a recession building, he's going to continue to be defensive in portfolios.

Market pessimism over Bayer-Monsanto deal presents buying opportunity

Bayer's all-cash offer of $128 (U.S.) for Monsanto looks rich to many investors, and they also see the need get the blessings of regulators in more than two dozen countries as a challenge and place significant odds on the deal failing, writes David Milstead. The combination of pessimism presents an interesting buying opportunity for both stocks, however. Investors who want to bet on the successful completion of the Bayer-Monsanto merger will make a tidy profit at the agreed-upon price. Investors who take the long-term view on agriculture, and are willing to hold a more diversified company than today's Bayer, will ultimately benefit from the German company's decision to make its move at a time when so many are so downbeat on agribusiness stocks.

How to avoid a very costly rookie investing mistake

Picking the wrong online broker is one of the more expensive mistakes rookie investors can make, writes Rob Carrick. Watch out for what fees they have for transferring your account.

How to reduce forex charges when buying U.S. listed stocks and ETFs

One of the frustrations of being a well-diversified investor is the cost of changing Canadian dollars into U.S. currency, writes Rob Carrick. Foreign exchange is a profit centre for online brokers and one of the biggest complaints readers bring to me about their firms. What can the everyday DIY investor do to reduce forex charges when using Canadian dollars to diversify with U.S.-listed stocks and ETFs? To start, use a broker that lets you keep U.S. dollars in your TFSA, RRSP and RRIF accounts.

Number Cruncher

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Ask Globe Investor

The Question:

Why do you always report returns before tax? This is misleading as there are taxes on dividend and interest income and taxes on capital gains when a security is sold. I wish financial writers would acknowledge the impact of taxes more often.

The Answer:

Financial writers aren't trying to make returns look better than they are by reporting them on a pre-tax basis. It's just that reporting returns on an after-tax basis isn't practical, because the amount of tax – if any – varies depending on the individual's circumstances and the type of account.

For example, if I hold shares of XYZ in a tax-free savings account and they post a total return of 15 per cent, the entire return will be mine to keep. But if you hold XYZ in a non-registered account, you'll likely pay some tax on XYZ's dividends and capital gains and your after-tax return will be less than 15 per cent. Another person might pay more – or less – tax than you do depending on his or her province and income level.

That's why the accepted convention is to report returns of stocks and indexes on a pre-tax basis. I should also point out that in my Investor Clinic columns, I frequently discuss tax matters, often with the help of outside experts. I'll continue to do that in 2017.

--John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.


What's up in the days ahead

In Wednesday's Globe Investor, our four Strategy Lab participants face off and predict what may be in store for their investment styles in 2017. Meanwhile, our Ian McGugan will tell us why we could be in the final days of these positively giddy markets.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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