Don’t Take The Bait – Follow The Fundamentals – Investing

When it comes to saving for your financial goals it’s important to stick with the fundamentals of investing. Far too often we see clients and prospects that stray and pay the price. You really must have discipline and remove the emotion out of your process.

In times of rising tides, we become overconfident in our ability to predict outcomes. A bull market at the end of its run is full of investors who feel they can do no wrong. They typically don’t feel that way a year after a market correction.

The last year saw real estate corrections in Canada’s largest market, the Greater Toronto area, of up to 40% and it wasn’t alone. Yet, if you bought a home in Windsor last year it would have appreciated in value. Just another form of investing for many that shows that most forms of investment vehicles have fluctuations and how there’s value in diversification.  No different than a stock market correction.

What happens when we have extended periods of success is you see investors leave their fundamentals behind. Those with little real estate experience are suddenly buying rental properties and those with little investing experience are buying marijuana stocks with half their investments. Yet many of these same people if they completed the industry standard risk profilers would come out as conservative investors and not those with a stomach for risk.

We get overconfident and trick ourselves into going beyond our risk tolerance when we start to feel things are bulletproof. They never are. By the time most of the general public hears about a great stick to invest to the run is over and then once they buy it emotion makes them hand onto the investment too long always feeling it will come back. In Canada one only has to look as far as Nortel for an example. Few people openly admit to having owned it during its fall.

There is currently a theme here. The stock markets have had a long bull run and are performing well above fundamentals. There is a fundamental many pundits follow called the “yield curve”. This measures essentially the difference between short and long term bond rates. In normal times long term carries more risk and as such usually has a better rate of return. When short term starts to exceed long term that means that the market feels the long term outlook is not favourable. The yield curve is flattening and close to going to negative. About 2/3rds of the time this is the signal of an upcoming recession, the steepness of the negative determining how deep the recession or at minimum market adjustment.

Much like the real estate market of last year in Toronto we may see an adjustment to markets in the near term. Emotion however will keep many people over invested in riskier investments than perhaps they would normally be comfortable in. If the adjustment comes before they conservatize things they will impact their rates of return negatively.

This doesn’t mean the sky is falling. It simply reinforces the principals of effective financial planning and prudence. If you are conservative by nature you shouldn’t have half your portfolio in cannabis. Risk management is a larger part of financial planning than gross returns simply because for a normally balanced investor imbalanced risk can do more damage than the positives of aggressive investing. Keep in mind more than two thirds of the population would fall into the balanced category.

The keys to saving large amounts of money are consistent tax efficient savings. Dollar cost averaging which is easy to do through a work pension or group savings plan will amplify you returns. Using an auto rebalancing feature will ensure your portfolio stays onside with your risk tolerance and ironically automates buying low and selling high also aiding your net returns.

Group plans often have matching amounts from the employer and are a great way to save. If you don’t have one set up a monthly contribution plan and work with an advisor. There are several reasons investors working with advisors have historically outperformed self investing by a large margin.

First, they can save you from yourself. They can talk you out of the emotional purchase or at least make sure you only buy a percentage that keeps your portfolio in balance. Next, they will help you develop a plan, so you know how much you need to save to meet your financial goals, whether it’s university for a child, a cottage or retirement, whatever your particular dreams are. Lastly, they will help you do it in the most tax efficient manner. As the tax system gets more and more complex it couldn’t be more important than to plan the tax now and on withdrawal of your investments and when you need the funds. An advisor will also make sure you are diversified enough to ride out fluctuations and remove over concentration risks.

So, don’t take the bait, yes its been a good run on the market, yes cannabis in general is performing very well. Follow the fundamentals and when you retire you’ll be well ahead of the crowd.

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