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In Fisher Investments Canada’s experience, selecting the best-performing shares doesn’t necessarily determine long-term investing success. Investor behaviour—including staying disciplined through emotional challenges—very often plays a bigger role. A key to maintaining discipline? Realising you could always be wrong. Fisher Investments Canada has several basic tips investors can use to put this mindset into practice.

One important step to take, in Fisher Investments Canada’s view: Avoid overconcentration. Putting a large portion of your assets into a single firm’s shares makes your portfolio vulnerable to company-specific issues—including the risk of collapse. High-profile, if extreme, examples include German payment processor Wirecard AG, Portuguese lender Banco Espírito Santo and American energy firm Enron. But beyond these failures, concentrating in struggling companies like those in the oil and gas exploration industry in recent years could greatly harm portfolio results. In Fisher Investments Canada’s view, no single company should exceed about 5% of your portfolio’s value—though this is more of a guideline than a strict rule.

For companies with the largest market capitalisation (a measure of a firm’s size calculated by multiplying its share price by the number of shares outstanding) in a broad equity index, we think it makes sense to compare the percentage the company comprises in your portfolio to the percentage the company comprises in the index. If the percentage in your portfolio vastly exceeds the index’s weighting, you may have too much exposure to that company. A key part to this assessment: Ensure the equity index you are reviewing is actually broad. Many smaller European markets are dominated by one or two companies. If so, in Fisher Investments Canada’s view, you must look more broadly.

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By avoiding overconcentration, you acknowledge you could be wrong about a company’s prospects. This is particularly important for companies or sectors you are familiar with because of personal knowledge (for example, work experience). That bias may create blind spots—that is, you may be wrong. Unless you are in senior management, it is unlikely you know everything about a company (and many senior managers of bigger firms rarely know all the details, either). Beyond the firm itself, external factors—including regulatory or legislative shifts—may hurt shares. They could also fall in sympathy if a competitor, supplier or peer suffers a major setback.

Based on Fisher Investments Canada’s experience, many investors recognise the issues with over-concentrating in a single company, so they seek to diversify—to spread their assets across multiple securities—to manage risk. But simply owning several companies doesn’t provide sufficient diversification, in our view. If you own a bunch of companies clustered in one sector, you may still run a type of overconcentration risk. Based on Fisher Investments Canada’s analysis, firms within the same sector tend to behave similarly, as they respond to the same general economic and political factors affecting profitability.

In Fisher Investments Canada’s view, proper diversification means owning a variety of categories of shares that behave differently depending on economic and market conditions. The reason this is important: No matter how strong your opinion about what markets will do next, you could always be wrong. Diversification spreads both the risks and opportunities across different share categories. If one category gets slammed unexpectedly, it won’t sink your portfolio. Diversification also ensures you have exposure to unexpected good things that happen in areas you might otherwise overlook. Two common category examples: sector and geography. For the former, equity index provider MSCI lists 11 different equity sectors, including Technology, Financials and Energy. A diversified portfolio will have some exposure across these sectors, as each responds to different economic drivers. Geographically, we don’t think investors should focus only on their home country’s market, which may skew to just one sector (or even company). Looking beyond your borders provides opportunities to owning different types of companies—and also protects against country-specific political risks or sector/company overconcentration.

Beyond portfolio construction, one of long-term investing’s biggest challenges is not acting on emotions. Feelings can flip frequently and, in investing, could be dangerously wrong. Fear may lead you to sell after a decline. Greed could drive you to buy into surging shares after they rise. These emotional decisions can make it harder to reach your investment goals. Based on Fisher Investments Canada’s analysis, long-term investing success comes from obtaining market-like returns over your time horizon—the period in which you need your portfolio to provide for you. Whilst other factors, including risk tolerance, are important, Fisher Investments Canada thinks keeping your specific goals and objectives front of mind can instil discipline. If the temptation to act on emotion arises, consider the risk to your goals if your decision proves wrong.

Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

This content was produced by Fisher Investments Canada. The Globe and Mail was not involved in its creation.

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