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Managing your own investments can be addictive. All that buying and selling and selecting securities is exciting. But many do-it-yourself investors get into trouble by placing too much importance on the aspects of portfolio management that contribute the least to long-term portfolio growth.
Research has shown that creating tax efficiency in your portfolio accounts on average for about 28% of overall long-term investment returns. The next largest influence is the time you spend on management, at 26% of portfolio returns. Managing your emotions (all that fear and greed) adds up to about 20% ranking.
Getting the asset mix right accounts for about 17% of what goes into total returns. And security selection – something that investors spend the most time on – has only a 2% importance ranking in determining long-term portfolio outcomes.
It’s easy to get carried away with online trading in self-directed investment accounts, but you may be generating unnecessary brokerage commissions and accumulating a hefty tax bill along the way. So how do you get back on track and focus on the important parts of your portfolio management? The key is to step back from the trading screen for long enough to take a look at your whole portfolio. Consider these crucial factors:
How you divide your assets among the three key asset groups (safety, income, and growth) largely determines the return you can expect and the risk that you’re accepting over your expected time horizon. When that allocation is skewed by extraordinary gains or losses in one class or another, as has happened recently, your risk profile will change as a consequence. A portfolio unintentionally overweighted to defensive investments will dampen longer-term returns if left unattended. Do an annual rebalancing to bring your asset allocation back into line with your time horizon, return target, and risk profile.
Is your portfolio sufficiently diversified in each main asset class? Diversification is at the heart of best practices portfolio planning. It makes no sense at all from a risk-mitigation perspective to have your portfolio allocated 50% to fixed income and 50% to equities, and then have only one bond and one stock in each class. Review your portfolio to ensure individual asset classes contain sufficiently diversified individual securities. In fixed income, for example, you’d spread weightings among federal, provincial, and corporate bonds of different maturities. And in equities, you’d diversify by sector, by region, by capitalization, dividend payment, and so on to achieve your desired risk level.
When researched, analyzed, and selected properly, individual stocks and bonds within a portfolio work in harmony to achieve a specific purpose, say a minimum dividend yield or a specific target price gain or a specified yield to maturity. When that target has been achieved, the position is usually analyzed to determine whether a switch or change within the portfolio is needed.
Stay away from speculative small-caps in the resources sectors, unless you consider yourself highly risk-tolerant, and willing to lose everything you bet.
If you’ve decided to outsource some or all of your portfolio to actively-managed mutual funds or exchange-traded funds, you should review your investment rationale and compare it with the funds’ recent performance. Broader, passive index-tracking ETFs and mutual funds will have fulfilled their mandate and tracked their benchmark indexes. But actively-managed offerings should fare better (that’s why you are paying more the “active” part of the equation).
If they didn’t, find out why. Was there a recent change in fund manager, objective, risk rating, or mandate? For ETFs, was there a change in index methodology or liquidity or ownership? Funds and ETFs are frequently closed, merged, and renamed. If this has occurred to your funds, review the new funds’ mandates to ensure they’ll still deliver what you expected when you first purchased them. If not, consider switching to something more appropriate.
The market is an emotional place. There’s fear. There’s greed. There’s high drama. You can grow too attached to an investment. Or come to loathe it for no good reason. Or you can be a lemming, and just do what everyone else does, happily running over a cliff.
When buying a financial asset, especially a stock, have you truly done your objective due diligence – financial statement, earnings, risks, estimates and guidance? If not, you may be a victim of “hot stock syndrome” – investing in a fad stock or sector or in a company that’s currently in the limelight. Fads come and go, usually with astonishing rapidity. And you could be left holding the proverbial bag and a big loss.
Similarly, if you get the urge to sell stock, ask yourself why. What is it about the company that’s changed? Have a stock’s fundamentals deteriorated badly – revenue, cash flow, earnings? Has the company declared bankruptcy? What’s changed since yesterday, when you thought your investment was brilliant? Has the stock reached your pre-determined sell target level? If you have no good reason other than “the market is falling,” you’d better re-check your risk tolerance and your ability to withstand market volatility. Maybe move into a high interest savings account or ETF, or purchase some guaranteed investment certificates.
Do-it-yourself investing can be enjoyable and lucrative, if you follow these basic principles of portfolio planning and management. If not, and if you find your portfolio consistently in the red because of poor decisions you have made, you might consider handing the reins over to a professional financial advisor.
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, financial mentor, and motivational speaker.
Notes and Disclaimer
Content copyright © 2023 by Robyn K. Thompson. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.
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