Some cold, hard advice for 2010: Avoid chasing hot trends, hold your fund managers accountable, beware a rising dollar and consider paying down debts instead of investing.
Let's start with the new themes, hot stocks and fabulous funds you're bound to read about as the investing world looks to the year ahead. Investment adviser Scott Tomenson of Wellington West Capital warns against getting caught up in this sort of hype because it's often meant to sell products rather than build sound portfolios.
Trend-chasing can also set you up as a patsy. Mr. Tomenson said the pros will sometimes take a position in a particular stock or sector, and then talk it up as a big opportunity. Great excitement ensues, individual investors buy in and the pros lock in their profits.
“When the music stops, more often than not it's the retail investor who's getting stuck,” Mr. Tomenson said.
Next piece of advice for 2010: Evaluate the job done this year by the money managers looking after your investments, and the value you're getting for the fees you pay.
Anthony Layton, president of PWL Capital in Montreal, recommends comparing your various portfolio components with the appropriate benchmark stock and bond indexes. For example, the S&P/TSX composite index for your Canadian equity funds or individual stock holdings, and the DEX Universe Bond index for bond funds.
“Make certain you're getting close to what the market is providing,” Mr. Layton said. “This is a time when we've had huge volatility in the market, so you have to make sure that your account has not fallen off a cliff.”
Mr. Layton said money managers should have taken advantage of the market lows of March to re-balance portfolios. That means taking money out of safe investments and buying beaten-down stocks. But just as many investors have insisted on staying conservative and thus missed out on the stock market rally, so have some managers. “They have been too defensive and are still sitting on cash,” Mr. Layton said.
Some investment firms provide statements that do a great job of showing how client accounts are doing, while others offer so little information that you have to wonder if they're made a corporate policy of being evasive. Mr. Layton said that if you don't get a proper statement from your firm, ask your adviser to provide you with an analysis of how your portfolio has done in the short and long term. Remember to ask for not only your own returns, but also those of the appropriate benchmarks.
Now for a completely different spin on benchmarks, particularly stock indexes like the S&P/TSX composite: At Avenue Investment Management, they suggest that investors avoid comparing their returns to index ups and downs.
Bill Harris, a portfolio manager at Avenue, said the S&P/TSX index is actually a “terrible” index for influencing the holdings of mainstream investors. “It's 50 per cent resources when, the last time I checked, that's still a cyclical industry,” he said. “The rest is financial companies and Research In Motion – that's basically our index and it's crazy to compare yourself against that.”
This is a bit of an exaggeration in that about 20 per cent of the index is in other areas. Still, Mr. Harris suggests focusing less on trying to match the index and more on trying not to lose money while generating a steady rate of return. His firm strives for 8 to 10 per cent a year. Care to try this approach for yourself in 2010? Then consider a couple of examples of the kinds of investments that Avenue looks at.
