Martin Pelletier: Never let emotion drive the investment decision-making process
A trader works on the floor of the New York Stock Exchange. Photo by REUTERS/Brendan McDermid files Investors sometimes need a friendly reminder to play the long game, especially during these uncertain times when many are wondering if the recent market rally is just another head fake or the beginning of a sustainable recovery.
Advertisement 2 This advertisement has not loaded yet, but your article continues below.
We can’t blame them for their trepidation, because pundits keep telling us to place our bets on red or black and whether central banks such as the United States Federal Reserve are going to pivot or not with their ongoing tightening.
Strong employment data has central banks hiking rates by 75 basis points, sending markets lower one day, only to be followed by consumer price index data that has them hiking just 50 basis points, sending markets higher with the magnitude dependent on the level of duration exposure.
This isn’t surprising given just how addicted we’ve become to loose monetary policy.
That said, there is something that we think can really help keep you centred and on the right path going forward: Instead of getting caught up in all this binary nonsense, remember that both bear and bull markets come and go, at times faster or slower than others, but they all ultimately come to an end at some point.
Advertisement 3 This advertisement has not loaded yet, but your article continues below.
The bottom line is that over the longer term, there must be a return on invested capital or else the system breaks, and the winners have always been those betting on capitalism, not against it.
Therefore, you shouldn’t get distracted by the daily ups and downs, but stick to your investment plan and play the long game. This doesn’t mean not being active in the management of your portfolio, especially when it comes to managing risk, far from it.
But, most importantly, never let emotion drive the investment decision-making process. Here are three ways to help prevent this from happening to your investment process.
Goals-based benchmarking The problem with indexes is figuring out which is the correct one to choose to compare against your portfolio. This can lead to performance chasing even among investment pros who face career risk for not beating the hottest market.
This advertisement has not loaded yet, but your article continues below.
Article content Since the Fed began quantitative easing back in 2009, the low-rate, longer-duration tech-orientated U.S. equity market has been the top performer, but many forget that during the prior decade, resource-based, commodity-oriented markets such as Canada and emerging markets were the ones in the spotlight.
Avoid all this by charting your own course. Set a target return to meet a certain financial goal specific to you and your family and reflective of the market conditions of the time. Then, position your portfolio to try to meet it by taking as little risk as possible.
Risk management Understand there is a time to add risk and a time to reduce it, but not in an all-or-nothing fashion, otherwise there is the chance of missing out on market recoveries by capitulating at the bottom or, worse, adding at the top just before a market meltdown for fear of missing out.
This advertisement has not loaded yet, but your article continues below.
Article content We’re eating our own cooking when it comes to this. Our risk-managed, goals-based approach meant slightly underperforming on last year’s rally, but greatly protecting this year’s downside. As a result, this has given us the ability to add more risk to portfolios over the past few months following this year’s large market drawdown.
This is another reason why my outlook has been more bullish over the past few weeks than others. By minimizing losses, I’ve prevented emotion from clouding my vision.
Martin Pelletier: The end of cheap labour is a good thing for society, despite inflationary fears Beware of cherry pickers: Mixed economic data means bulls and bears both have strong cases Normalized interest rates are the cure, not the problem Advertisement 6 This advertisement has not loaded yet, but your article continues below.
Always keep moving Movement is life, and those who become complacent end up being left behind. It is common among those in my industry to tout buying, holding and forgetting about it. For the most part, the thesis is right, but it shouldn’t be used as an excuse to not actively rebalance.
For example, a few months ago, we were adding to our underweight position in longer-duration growth segments of the market such as the S&P 500 given its large multiple contraction, which more recently is showing its merit. At the same time, we’ve been selectively adding to the energy space on the large selloff in June given our favourable long-term outlook for the sector.
Remember to play your own game, not someone else’s and you will do just fine. This is easier said than done, but we think deploying the aforementioned strategies around an individualized investment plan can greatly increase the probability of achieving your financial goals and objectives.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
_____________________________________________________________
If you like this story, sign up for the FP Investor Newsletter.
_____________________________________________________________
Financial Post Top Stories Sign up to receive the daily top stories from the Financial Post, a division of Postmedia Network Inc.
By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300