10 ways for investors to be more boring —and successful

If you ask people what they think an investment advisor or portfolio manager does, many will say something about picking stocks, choosing funds or timing the ups and downs of the market. But that’s like saying a dramatic courtroom scene is a realistic portrayal of what a lawyer does or that James Bond is a true reflection of espionage – which they’re not. The fact is most of the value a professional actually provides isn’t particularly glamorous nor exciting – sometimes it can be downright mundane – but that doesn’t mean it isn’t critical.

One company I’m fond of, Dimensional Fund Advisors, has put together a list of ten admittedly boring but nonetheless effective principles aimed at helping investors have a better investment experience. It goes without saying that, while a “better experience” is no guarantee of a positive outcome, these 10 concepts go a long way to improving the odds.

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1. Embrace market pricing

The point here is that capital markets are effective and efficient information processors. With literally millions of people and institutions buying and selling, the price discovery process makes for prices that are reliably fair.

2. Don’t try to outguess the market

As participants try to outsmart one another, most fail as a direct result of their efforts. As evidence, only about 17% of U.S. equity mutual funds have both survived and outperformed their benchmarks over a 15-year timeframe.

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3. Resist chasing past performance

Products that have performed well in the past do not always persist as “winners” looking forward. Of course, everyone knows this, as a disclaimer to that effect is posted on pretty much every ad, prospectus and fund facts document that’s ever been printed. Unfortunately, many people invest based on past performance anyway.

4. Let markets work for you

Markets generally go up over longer time horizons. Many investors, however, tend to bail more quickly than they should.

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5. Consider the drivers of returns

Research has repeatedly shown that there are factors that correlate to higher expected returns. These dimensions are pervasive, persistent and robust. For equities, those dimensions of expected returns include:

  • the market (stocks outperform bonds);
  • size (small companies outperform larger ones);
  • price (value stocks outperform growth stocks); and
  • profitability (profitable companies outperform unprofitable ones).

For income investors, the drivers are twofold:

  • term (long-duration bonds have higher risks and rewards); and
  • credit (lower-credit bonds have more risk but higher expected returns than high-credit bonds).

6. Practice smart diversification

By holding broad baskets of different asset classes, people can realize better risk-adjusted returns. Most investors hold far too much in their home market (Canada in our case).

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7. Avoid market timing

We’ve already mentioned this but, in spite of many peoples’ best efforts, no one can reliably predict which countries, segments or companies will go up or down, and by how much or when.

8. Manage your emotions

Too many people feel almost bulletproof when markets are doing well and/or despondent when markets are experiencing a prolonged downturn. In some ways, people who can “set it and forget it” often do better because they minimize the self-destructive tendencies that go hand in hand with emotional decision-making.

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9. Look beyond the headlines

Most people would do well to be less concerned about the day-to-day gyrations of capital markets. The media does a good job in creating anxiety because anxiety sells papers and generates increases viewership. Let fads go and focus on a long-term perspective.

10. Focus on what you can control

Advisors can help with the things that actually do make a positive difference. These behaviours include creating an investment plan that suits the investor, harnessing the risk/return tradeoffs that make people more comfortable, diversifying more, reducing expenses and turnover and minimizing taxes.

By putting all of these relatively basic ideas into play, it tilts the odds in favour of investors who are focused and disciplined, and most will end up having a better investment experience. What’s more, working with an advisor who can facilitate that process will increase the chances of a superior outcome even more.

John De Goey is a Portfolio Manager with Industrial Alliance Securities Inc. and the author of The Professional Financial Advisor IV.  Industrial Alliance Inc. is a member of the Canadian Investor Protection Fund. The opinions expressed herein are those of Mr. De Goey alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.


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