This article was first published in the National Post on February 19, 2022. It is being republished with permission.
by Tom Bradley
It’s human nature to go straight for the fun stuff. In investing, that means looking for the next Amazon, riding the oil price with a micro-cap energy stock or adding juice to your portfolio by using options, sector exchange-traded funds or an investment loan.
Whether high octane or a stay-at-home balanced portfolio is your thing, you need to work from a solid foundation. An analytical foundation, for sure, but also a behavioural one.
We’ve just published a report that focuses on the latter: a behavioural framework from which to invest (and maybe do some fun stuff). It’s called The Five Essentials and addresses the skills successful investors need to master. It could also be titled: Five Things in Investing You Can Actually Control.
We did the report because your behaviour is the biggest factor on how well your portfolio does. Yes, picking the right stocks (or investment manager) and keeping fees down are important, but your actions, particularly when markets are at extremes, have an even bigger impact.
Indeed, one of the five essentials is to be prepared for extremes. It’s a reliable fact that markets overreact in both directions. It’s not a matter of if the market blows your socks off one day and melts down another, but when.
Investors make their biggest mistakes when prices are far off trend. Fuelled by emotion, they make their boldest moves, often with disastrous results.
The other four behaviours we highlight and present below will help you stay steady and get the most out of your portfolio over the long term.
Investing is all about expectations. Apple shares trade on what the company is expected to earn. Bond prices have interest rate expectations built into them. Similarly, your investment process needs to be rooted in realistic expectations.
First and foremost, be realistic about the time you have to devote to investing, the knowledge and discipline you bring, and, the biggie, whether you have the temperament to deal with market gyrations. If you can’t tick these three boxes, you need to hire someone to help.
Second, be realistic about your target return. A reliable indicator of future fixed-income returns is current bond yields, which are now in the range of 2-3%. Stocks have earned 9-10% over the past 20, 40 and 60 years, not the 15-20% they did last year.
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Balanced portfolios are somewhere in between. For planning purposes, the Goldilocks approach is a good one – not too high, not too low.
And expect your returns to come in spurts, often when you least expect them, and rarely when the experts say they will.
Have a plan
It’s old-fashioned, but having a road map is crucial, particularly when things aren’t going well. It’s then that you need something to remind you what the money’s for, how long your time frame is, and how much capacity you have for downside risk.
In this regard, our report focuses on your strategic asset mix (SAM). It’s the best tool you have for matching your portfolio to your needs and personality.
Commit to a routine
A repeatable routine helps take the emotion out of investing. The good practice cornerstones are: making regular contributions (automatic monthly contributions are best); rebalancing back to your SAM; and having an annual meeting with your adviser.
Reviewing your investments thoroughly once or twice a year is better than passing glances multiple times a month, or day.
Routine is all about discipline, which is a key attribute of all successful investors. It means doing the same things whether markets are going up, down or sideways.
Look in the mirror
You’re looking at the CEO of your portfolio. This is often lost on people. They’re quick to blame their adviser or bank, forgetting that the buck stops with the person who hired them.
If you use someone to do the security selection, trading and financial planning, you are delegating, not abdicating, your responsibility. How good your adviser is and how much you’re paying are on you.
You don’t have to be an investment expert to get superior results, but you do need to design a process and team to fit who you are. Think ahead like the stock market does. Don’t be afraid to be boringly repetitive. And never forget who the boss is.