To err is human. That's true in many parts of our lives, including our investments. We asked financial advisors to point out the common errors many of us make with our portfolios.
Paying too much attention to your investments
Investors have access to a great amount of information about their investments. They also have access to their portfolios on a real-time basis. One of the biggest mistakes investors can make is paying too much attention.
“It sounds counterintuitive, but emotions can get the better of us, particularly when it comes to money,” says Dan Nolan, investment advisor with Investment Planning Counsel. Seeing a negative outcome can cause a greater emotional response than seeing positive ones, he notes – and an emotional decision caused by a short-term negative market move can damage long-term wealth creation.
Chasing a ‘hot’ investment
Hot stocks of late have mostly come from the technology and cannabis sectors, but even those stocks have not been a guarantee of success, says Allan Small, senior investment advisor at Allan Small Financial Group – HollisWealth.
“I know investors who bought marijuana stocks at the start of the year and are actually down 20 to 25 per cent,” he says. “In my opinion, investors need an investment discipline and they need to stick to that discipline. To go and chase a hot stock because it has been rising is not something I recommend.”
Mr. Small notes the importance of buying quality investments that fit your needs rather than chasing overhyped stocks that don't have strong fundamental valuations. “I can tell you valuations will eventually matter, and an investment that is overvalued will come back to earth.”
Being afraid to take a loss
Investors need to focus on the long term, but that doesn’t mean they should never sell investments that have lost value, says Ryan Lewenza, senior vice-president and portfolio manager at Turner Investments – Raymond James Ltd.
If the fundamental rationale behind the initial purchase has changed or not materialized, investors should re-examine the position and consider selling it. “We can’t win them all, so investors need to recognize that sometimes selling a losing position can be the best course of action.”
Assuming that bigger companies are better companies
Large companies that have been around for a long time are often viewed as being safe. But several big companies have had sharp falls in recent years, such as General Electric Co., Johnson and Johnson Inc. and Eastman Kodak Co. in the United States, and Nortel Networks and BlackBerry Ltd. here in Canada.
Many of these blue-chip companies have faced quickly changing technologies, but share prices have also been overvalued by complacent investors, says Kash Pashootan, chief executive officer and chief investment officer at First Avenue Investment Counsel.
Trying to time the market
Many investors believe they will know when an investment is at or near the top of its value. They also think they will know when to buy, when that investment is at a low. And they think they have figured out a stock’s movement pattern, and are convinced its value will go higher, Mr. Small says.
“It never dawns on them that the investment could lose value,” he says.
Investors also often try to time the overall stock market. “In 2007 and 2008, I spoke to many investors who just wanted to exit the markets and get back in when things settle,” says Mr. Small. “My question always was, ‘How will you know when to get back in?’ There are always storm clouds on the horizon, it’s never blue sky. Cashing in your investments is easy; knowing when to get back in is always the difficult part.”
For many investors, the starting point to assessing the diversification of their portfolio is looking at how many separate investments appear on their statements: The more holdings, the more diversified they are. “Unfortunately, this is not accurate and can often be misleading as to how much risk one is exposed to without realizing it,” says Mr. Pashootan.
This problem is especially true with mutual funds and exchange traded funds (ETFs). A portfolio may have an index fund, a dividend fund, a growth fund and two funds focusing on specific sectors, but the funds may actually hold many of the same stocks and therefore will perform similarly, failing to provide the benefits of diversification.
Pursuing yield above all else
The first place many think of for income and yield are bonds. Traditionally bonds have been a great way to achieve that objective within a portfolio – that is, until the decade of low interest rates arrived. The risk lies in the belief of many investors that bonds and safety are synonymous with each other.
But not all bonds are created with the same risk-and-return profile. Mr. Pashootan has found that often the bond component of an investor’s portfolio is as risky or even more risky than their equities. For example, in 2008 high-yield bonds lost 26 per cent of their value.
The dangers of the pursuit of yield also apply to dividend-paying stocks. He points to the example of Corus Entertainment Inc. – a well-established Canadian company that last year was paying a dividend yield of more than 10 per cent. But the company’s declining performance led to its shares losing more than 50 per cent of their value, which outweighed the benefit of the dividend. To make matters worse, this summer the company cut its dividend by nearly 80 per cent.