One of the best year ahead articles I read over the holidays provided five useful tips to help investors avoid the usual psychological pitfalls that detract from portfolio returns.
In “Five Behavioural Resolutions for Investors in 2020”, portfolio manager Joe Wiggins (who also earned a masters degree in Behavioural Science at the London School of Economics) started by urging investors to attempt to predict market returns for the year. The idea is to write them down, review them at year-end, and see the tangible evidence that forecasting is impossible.
Mr. Wiggins’ suggestion to keep a written log of all investment decisions is similar in that it prevents investors from lying to themselves. He writes, “Our memories are incredibly fickle. It is not simply that we forget things, but that we re-write history based on information that we receive after we have made a decision.” A record of why an investor bought or sold what they did can be reviewed, and over time will help improve decision-making.
The author also recommends reading research opinions that conflict with our own at least once a week. Confirmation bias - building a blind spot by only recognizing information that fits with prior beliefs – is an important risk for investors.
The two remaining tips, ‘Be comfortable doing nothing’ and check portfolios less often are both designed to prevent over-trading. Academic research has consistently shown that investment performance declines as the number of transactions rises.
-- Scott Barlow, Globe and Mail market strategist
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Others (for everyone)
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Ask Globe Investor
Question: Currently I have a corporation with multiple seven figures in investible capital. My family gets sufficient income from the family trust and so we do not need cash flow from this money.
I would like to invest in a tax-efficient manner with a 20-year horizon. The funds can be held in Canadian or U.S. dollars. Do you have any specific advice as to how to build a sensible portfolio and which markets you would be most exposed to? My objective is over a 20-year period to have grown the assets as much as is possible, observing a responsible level of risk. Currently, I have a traditional 70/30 split between Fortune 500 stocks and fixed income.
Answer: For starters, I would suggest you reconsider the 30-per-cent fixed income holding. That’s a useful cushion against a market meltdown, but you’re looking at a 20-year time horizon. Using that parameter, a high fixed-income allocation will hold down your total return over time. Consider cutting back to 20 per cent or even 15 per cent. (I would never suggest this to an older person but we’re looking long-term here).
Based on what you tell me, you have no exposure to emerging markets. Southeast Asia, including India and China, should lead the world in growth over the next 20 years because of their young and upwardly mobile populations. I would consider putting 10-15 per cent of the portfolio into low-cost ETFs that focus on that region.
You also seen to have no exposure to Europe and Japan. I believe these will be slower growth areas, but they should not be ignored entirely if you are to have geographic balance.
Your emphasis on the U.S. and the Fortune 500 companies is on target from my perspective. But if you are going to enhance tax efficiency, you need some exposure to Canadian dividend stocks and REITs.
Overall, I would look at a mix like this: 40-per-cent U.S., 20-per-cent Canadian, 15-per-cent emerging markets, 10-per-cent EAFE, 15-per-cent fixed income.
As for the holdings, use ETFs for emerging markets, EAFE, and fixed income. Stick with high-quality blue-chip stocks for the U.S. and Canada.
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
For investors who count on Canadian bank stocks to deliver steady profit growth and market-beating returns, their performance in 2019 was only so-so. Brace yourself: Analysts expect 2020 won’t be much better. David Berman will explain.
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Compiled by Globe Investor Staff