The financial crisis was a hugely important event in market history and for investors it was also psychologically scarring. Watching the S&P/TSX composite repeatedly drop 500 or even 700 points before lunch -- for days on end -- caused consistent anxiety about the evaporation of investors' life savings and the standards of living in retirement.
Eight years later, when headlines like 'Hedge funds are dumping Deutsche Bank and shares are tanking' appear, crisis-era fears resurface, whether they're warranted or not. This is a human psychological trait called 'recency bias,' and one that is frequently harmful to portfolio returns.
The indispensable Psy-Fi blog describes recency bias as "[overfocusing] on the most recent events you've experienced and neglect to worry about older information. We don't so much integrate new information with the old as use it to overwrite our memories."
In the current investing environment, memories of 2008 are so painfully fresh that investors' reaction to trouble at Deutsche Bank is immediately interpreted as "Oh, no, the financial world's ending again." They have 'overwritten' memories of the decades of strong, consistent returns on bank stocks enjoyed before the crisis.
It might feel like the onset of another crisis for investors but there's numerous reasons why Deutsche Bank kicking off another 2008-like calamity is unlikely. None of the concerns regarding the bank involve asset impairment, so there are marketable instruments for Deutsche Bank to sell. The European Central Bank, and the German government, learned from experience that they will have to act quickly if things get serious to prevent another Lehman Brothers situation. In addition, regulation has forced all global banks to carry less risk, so the chance for contagion throughout the financial system is less likely.
Recency bias is only one example of how evolution has molded our brains to become terrible investors. I highly suggest investors peruse Psy-Fi blog's Big List of Behavioural Biases and pay special attention to "Anchoring: the Mother of All Behavioural Biases."
-- Scott Barlow
Three big numbers to note
23.6 That's how many times earnings equities in the S&P/TSX composite index traded on Friday, the highest since September, 2002.
13% Year-to-date gains for the TSX - the second-most among developed markets after New Zealand.
15% The TSX price premium over U.S. stocks, the widest gap since 2009.
Stocks to ponder
Onex Corp. This stock of this private equity firm was on the positive breakouts list on the TSX until the final hour of trading on Tuesday, when the share price suddenly lost support and closed lower, writes Jennifer Dowty. The company pays and annual dividend of 27.5 cents, which equals a dividend yield of 0.3 per cent. It has boosted its dividend each May since 2013. As of the end of the first quarter, management owned 17 per cent of the shares outstanding. This stock has shown a steady, positive long-term performance. The average one-year target price is $84.70, which implies limited upside potential over the next 12 months.
Brookfield Asset Management Inc. This consistent performer has outperformed the TSX for the past 4 years, writes Jennifer Dowty. Year to date, it is trailing the Index but has a respectable price return of 8 per cent. This asset management firm has a diversified portfolio of assets and recently reported solid second quarter results. It pays a dividend of 52 cents a year, for a yield of 1.5 per cent. It boosted its dividend in February, raising the quarterly dividend to 13 cents from 12 cents per share. Seven analysts have "buy" recommendations on the stock, and one has a "hold" recommendation.
NexGen Energy Ltd. Getting investors excited about a uranium investment is a tough sell with uranium prices near 11-year lows of about $25 (U.S) per pound. But Warren Irwin, the founder of Rosseau Asset Management, a hedge fund which specializes in alternative long-term investment strategies with a focus on the resource sector, writes Mark Bunting of Capital Ideas Digest. Mr. Irwin, whose firm is one of NexGen's largest shareholders, says the company has "all the hallmarks of a huge winner" with its discovery in the Athabasca Basin in northwestern Saskatechwan.
Enerflex Ltd. This stock has 9 unanimous 'buy' calls and a consistent dividend, writes Jennifer Dowty, and it appears on the positive breakouts list. Its recent results topped expectations and it reported strong bookings and backlog. It pays a dividend of 34 cents a year, for a yield of 2.4 per cent. The average one-year target price is $16.28, which implies upside potential of 13 per cent over the next 12 months.
The TSX outlook looks bright for October – especially for one sector
Canada's benchmark stock index has been trending up since the end of January, with year-to-date gains now surpassing 13 per cent. Those bracing for a pullback can take comfort. If history repeats itself, this positive momentum should continue in October. And, for those who believe in such seasonal trends, there's one sector in particular -- financials --that has a remarkable track record of making money for investors.
Why John Heinzl is a fan of "growing dividend growth."
Dividends are great, growing dividends are even better, says John Heinzl in his latest Yield Hog video.
Five stocks with a dividend-growth catalyst
When Darren Sissons, a partner with Campbell Lee & Ross Investment Management, is searching the globe for promising dividend stocks, yield is just one of the factors he considers. Among other things, he looks for companies that are leaders in their industry, produce strong free cash flow and have the ability to grow their dividends. A "positive catalyst" – such as a major acquisition – is also a big plus. If a company ticks off all those boxes, he tries to buy it when it's cheap. Here are five dividend stocks he likes right now: Enbridge Inc., Algonquin Power & Utilities Corp., H&R REIT, Royal Dutch Shell PLC, and Enercare Inc.
How can I find out exactly how much I paid my investment adviser?
Rob Carrick talks to Denise Morris from the Ontario Securities Commission in his Money Talks video about the new rules coming into play that will lay out the fees investors are paying their financial advisers. Most investors will start to see full accounts of the fees they're paying by the end of 2016 or early 2017.
What to buy if rates go negative
Interest rates have entered an unprecedented and unsettling period. Never before in history has such a huge amount of money been invested in securities that guarantee you'll lose some of your capital, writes Gordon Pape. According to Bloomberg, about $12-trillion (U.S.) worldwide is tied up in bonds that are guaranteed to lose money if held to maturity — and that figure is growing every month. He outlines three investments to look at if rates here go negative: bonds, REITs and Utilities.
With rising GIC sales, payouts may improve
Here's a bit of good news for the long-suffering investors who depend on guaranteed investment certificates for most or all of their holdings. A new report from banking industry consultants McVay & Associates says competition between financial institutions selling GICs is likely to increase in the months ahead. This raises the possibility of slightly higher rates on these safest of safe investments. But you need to shop around to get the best rates, writes Rob Carrick, such as dealing with a deposit broker, an investment adviser or dealing directly with an independent GIC-issuing firm rather than through an intermediary.
The one person preventing me from becoming truly bearish on equity markets
Financial insiders use the phrase "the bear case always sounds smarter" to warn against being overly clever about pessimistic market forecasts. Anyone can imagine disasters that could cause huge sell-offs but history has shown that over time, the path of least resistance for markets is higher. Scott Barlow writes that he keeps repeating "bear case always sounds smarter" to himself because he's sorely tempted to adopt a really, really negative outlook for equity markets. Helpfully, the strategist he trusts most remains bullish.
The market trends that are about to end and those that are just beginning
Since the market began its recovery following the 2008 financial crisis, a number of trends have dominated the landscape, writes Tom Bradley. To make sense of what's going on in the economy and capital markets, separate these trends into two lists – sustainable and unsustainable.
Gordon Pape's Aggressive TFSA Portfolio has jumped over 12 per cent in the last six months
Gordon Pape writes that he created the Aggressive TFSA Portfolio in March 2012. It invests exclusively in stock-based ETFs and is designed for readers whose goal is to maximize tax savings in their TFSAs and who are willing to accept a higher degree of risk and volatility. Here's a look at the ETFs in the portfolio.
Don't overlook this dividend ETF
One strategy for choosing exchange-traded funds is to simply go for the cheapest option in its category, writes Rob Carrick. But sometimes, you'll miss out on worthy funds that have virtues beyond low costs. An example is the PowerShares Canadian Dividend Index ETF (PDC). For a dividend ETF you want a low cost, good liquidity, a good yield, strong total returns, and diversification.
Something curious is going on with the loonie
The Canadian dollar has become, arguably, the most predictable tradable asset on the planet. It's almost mathematically impossible for the loonie to track bond yield spreads and crude prices more closely. It's not supposed to work this way and Scott Barlow says he strongly suspects. algorithmic trading is to blame.
CFO buying at Open Text
Ted Dixon looks at Open Text for this week's Who's Buying and Selling column, and finds that the company's chief financial officer John Doolittle is buying up shares in the company.
The week's most oversold and overbought stocks on the TSX
The S&P/TSX Composite dropped a marginal 0.2 per cent for the trading week ending with Thursday's close. According to Relative Strength Index (RSI), the domestic benchmark remains in neutral technical territory with a 56 RSI reading that is a bit closer to the sell signal of 70 than the buy signal of 30. There are four benchmark constituent stocks trading in official oversold territory with RSI levels below 30. Cominar REIT is the most oversold stock in the index followed by Macdonald Dettwiler & Associates Ltd., Cott Corp., and SNC-Lavalin Group Inc.
Ask Globe Investor
I'm 20 years old. How do I go about investing for the first time?
I had a lot of interests when I was 20. Investing certainly wasn't one of them. So kudos for getting started so early. But there's really no rush.
If you're in school, your focus should be finishing your education and then finding a secure job -- no easy feat in this market. Once you have found stable employment, you can turn your attention to saving, which is the first step in a successful investing plan.
Many young people find saving difficult, because costs for housing, food, cellphones, entertainment, clothing and other expenses can add up. I recommend keeping track of every penny you spend for several months. You can do this with a pen and paper or by reviewing your bank and credit card statements every month. Only then will you be able to determine where your money is going and therefore where you're able to cut back to save more.
At first, you can park your spare cash in a high-interest savings account. This won't make you rich, but at least your money will be safe as you embark on the next part of your journey: learning everything you can about investing. Read newspapers and websites; visit your library; watch investing videos on YouTube. It will all seem foreign at first, but it will eventually start to make sense.
I can't stress enough that there are a lot of bad investing products out there and a lot of dubious advice. The successful investors I know have learned to manage their own money rather than let someone else -- who may or may not have their interests at heart -- do it for them. They also keep it simple and avoid anything they don't understand.
When you're ready to take the plunge, do a google search for low-cost Canadian index mutual funds. This is a great place to start. Eventually, you may graduate to exchange-traded funds or to managing a portfolio of individual stocks. But this will take time.
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
Larry Berman Saturday will tell us why TSX energy stocks are not worth buying right now even given the OPEC agreement this past week to lower production quotes. Rob Carrick has some advice on investing for your child's education. And after a volatile week, John Heinzl will share six tips for coping with all the market mayhem.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston