From my experience in retirement planning I have witnessed certain investor habits that can lead people down a destructive path.
Although the stock market has moved higher in recent months, one can always learn to improve their investment practices.
The process can be overwhelming for some, particularly when volatility rears its ugly head, therefore I would like to provide some tips to help you reduce anxiety when times get tough.
Leave it to the professionals:
We don't recommend watching BNN regularly.
While they do present important news, unless you follow the markets and are experienced in finance, you may not fully understand the impact of the subject matter.
There is a great deal of financial jargon and the media will often overemphasize meaningless data, which can lead to poor decision making. Keep in mind that news anchors and most media figures don't actually manage investment portfolios, so why take their advice? Let your advisor follow the economic data and make the important investment decisions.
Refrain from looking online daily:
This habit can become addictive to some investors. You wouldn't look at the value of your home on a daily basis, so why look at your portfolio this way? It can cause unnecessary anxiety over short-term fluctuations. I suggest looking at your portfolio performance during semi-annual reviews or quarterly at most.
Properly evaluate performance:
It's important to compare your portfolio to the appropriate benchmark and judge the investment results in the context of the amount of risk taken to achieve them. Investors should never choose the top-performing index to relate their results to, particularly if your investments are not held in that market. For example, if you hold all Canadian stocks, you cannot compare your portfolio to the S&P 500. Likewise, if you hold all U.S. stocks in your portfolio, you cannot compare it to the TSX.
One of the best performing markets last year was actually Japan's Nikkei which was up 57 per cent, clearly a fantastic return, but one that also carries a massive amount of risk. The Nikkei would in fact have to rise around 140 per cent just to break even from the high reached 24 years ago in 1989. I can't say I know too many investors that enjoy this type of risk and volatility.
Take a holistic approach:
When reviewing your accounts it's natural to look at the best performing portfolio or fund and wonder why you didn't have more money in that particular investment. The answer to this question is simple - diversification is used to manage risk! The selection of various investments are usually recommended for a reason, taking into consideration how much exposure to the markets you should have overall and the risk level appropriate for your portfolio. No investment manager can lead the pack in every market environment and certain strategies work better in specific types of markets. By diversifying the portfolio amongst investments with varying levels of correlation, you can improve your risk profile overall.
These tips should enhance your investment experience and allow you to sleep at night!
Lori Pinkowski is a portfolio manager and senior vicepresident, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Friday on CKNW at 5:35 p.m.
