Tips to help you stay steady and get the most out of your portfolio over the long term
Investors make their biggest mistakes when prices are far off trend. Photo by Getty Images/iStockphoto files It’s human nature to go straight for the fun stuff. In investing, that means looking for the next Amazon.com Inc., 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.
Advertisement This advertisement has not loaded yet, but your article continues below.
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.
Advertisement This advertisement has not loaded yet, but your article continues below.
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.
Be realistic Investing is all about expectations. Apple Inc. 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.
This advertisement has not loaded yet, but your article continues below.
Article content 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 two to three per cent. Stocks have earned nine to 10 per cent over the past 20, 40 and 60 years, not the 15 to 20 per cent they did last year.
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.
This advertisement has not loaded yet, but your article continues below.
Article content 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.
This advertisement has not loaded yet, but your article continues below.
Article content 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.
Investors have subsidized our Uber rides, Spotify tunes and Netflix binging — but maybe not for much longer Tom Bradley: Four reasons the stock market will forever be unpredictable, erratic and prone to exaggeration Elon Musk? Apple? Nah, interest rates were the real star of the year 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.
This advertisement has not loaded yet, but your article continues below.
Article content 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.
Tom Bradley is chair and co-chief investment officer at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com.
_____________________________________________________________
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