High on the list of most urgent investing risks right now is hubris.
In today’s bull market for everything, it’s easy to become excessively confident about your ability to manage a portfolio. A reader who resisted this temptation got in touch recently with what you might call an existential investing question.
This reader says he spends a lot of time researching individual stocks and currently has 25 securities. “At the beginning of each month, [my online broker] shows the rate of return on my account,” he wrote. “I am proud of my work and see that I’m up about 30 per cent for the last 12 months. Then I looked at ETFs like XIC and XIU and saw they are up about the same. So, why am I doing this?”
Why, indeed. If your stock-picking results cannot beat an index-tracking exchange-traded fund such as the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T) or the iShares S&P/TSX 60 Index ETF (XIU-T), there’s no reason to manage your own portfolio of individual securities other than enjoying the process. That’s fair, by the way. Some people like to be hands-on and don’t mind if their performance is a bit off compared with an alternative approach.
But if your goal is maximum returns, then the true test of your investing chops is whether you can beat the returns of an ETF on an after-fee basis. You can make this comparison by:
- Checking your returns to the latest month-end using the portfolio monitoring tools on your online brokerage website (any decent broker has them).
- Calculating the total amount you paid in commissions each year to run your portfolio and then express as a percentage of your account’s total value; subtract this amount from your investment results for a net return.
- Checking the returns of a comparable ETF such as XIC for a portfolio of Canadian stocks – try the 2021 Globe and Mail ETF Buyer’s Guide for other ETF examples (tgam.ca/ETFbuyersguide2021).
It’s more important than ever to grade yourself as a stock-picker. We’ve had an incredible run-up in stocks since the March, 2020, crash and there could be more gains to come. But a pullback is coming at some point that will mercilessly expose unsound investment decisions.
Index-tracking ETFs will get pounded in the next stock market downturn – that’s a done deal. But portfolios heavy in the speculative stocks that have done well lately will almost certainly do worse. Other dangers for stock-pickers include overweighting sectors that have done well lately and ignoring the defensive sectors that help keep portfolios afloat in rough conditions.
XIU, one of the oldest ETFs, has produced an annualized total return of 7.5 per cent since it was listed for trading in September, 1999. If you can’t beat that return with your own stock picks after fees, consider joining the ever-growth crowd of ETF investors.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.