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Andrew Hallam is the index investor for Strategy Lab. Globe Unlimited subscribers can view his model portfolio here and read more in the series online here.
It isn't easy to pick the right investment strategy. For some, it could even be tougher than picking the right spouse. We put potential partners through trial runs. We date. If that goes well, we might consider a bigger test: perhaps a road trip or a vacation where we're in each other's bathroom space. If you keep catching metaphorical elbows at the sink, it might be best to bail. But if the trip goes well, the couple might eventually move into a shared nest. If they don't often fall out, they might choose to get married.
Many people choose investment strategies much the same way. They date different methods. But instead of committing, they often jump around like crazy Casanovas. In my last column, I wrote about a strategy called Dogs of the Dow. I received plenty of e-mails after that column was published. One thing disturbed me. Readers often said, "I'm going to try that strategy out." My column had mentioned that from 1991 to 2016, it would have turned $10,000 into $201,315. It's a good strategy. Those who committed to it would have done well.
But most investors would have dumped it some time between 1995 and 2005. Over that 10-year period, the S&P 500 beat it. Such investors would have missed its market-beating gains after 2005.
If they had tried the method, instead of committing to it, they would have been disappointed. Successful investors don't put investment strategies on trial runs. Our investment lifetimes are far too short. Instead, they should choose something carefully. I'm not talking about day trading, penny stocks or continually jumping into a magazine's next hot pick. I'm talking about choosing a long-term strategy with a methodology that works.
Trying (instead of committing) causes painful rebound after rebound. If a method does poorly over a five-year period, those who date it tend to dump it. The stock market is often a demonic kind of foe. Sometimes it favours growth investors. If growth stocks beat value stocks over a handful of years, people leave the Church of Value to fill the Church of Growth. They're often just in time for the demon's bait and switch. For the next three-, five- or 10-year period, value stocks could surge.
Whether you're a growth investor, value investor, index-fund investor or a high-dividend seeker, stick to the method. Each will have its years in the sun and its time in the dark. Don't switch methods based on short-term market whims or the decade's favoured style. In stock-market terms, 10 years is a blip.
Get good at what you do. If you're an index-fund investor, it's easy. Build a diversified portfolio of ETFs. Buy a Canadian, an American and an international stock-market index. For stability, add a Canadian bond index to the mix. Rebalance once a year to bring your portfolio back to its original allocation. If you're working, add more money every month. Mountains of evidence prove that, after fees, this method will beat most professional stock pickers.
Do you have the mettle to pick your own stocks? If that's the case, it will require effort and often nerves of steel. Become a serious student. Those who seek high-dividend-paying stocks should read Jeremy Siegel's book, The Future For Investors, and Michael O'Higgins' Beating the Dow. Growth investors should study the late Philip Fisher's classic Common Stocks and Uncommon Profits.
Value investors should practically memorize the late Benjamin Graham's The Intelligent Investor. Every type of stock picker, regardless of style, should also read (and reread) Howard Schilit's book Financial Shenanigans: How to Detect Financial Gimmicks and Fraud In Financial Reports.
Yes, these books may be old. Some have been revised. But they're classics for a reason; they have stood the test of time. Expect the same thing of your investment strategy. You'll make far more money if you're married to it.
Andrew Hallam