These 10 lessons can help make you a far more successful investor:
1. Be open to learning: Science trumps salesmanship, but you dont need a degree. We dont hesitate to trust the disciplines of mathematics, biology, physics and chemistry. Why then do we ignore the science of the markets and continually chase the latest trends? An understanding of financial research can forever impact the way we invest.
2. Capital markets work: The markets are efficient. This means securities prices reflect the knowledge and expectations of all investors and in the long run will reward our patience. We should piggyback on the different ways markets compensate us.
3. There is no free lunch! The market rewards investors who take greater risks. Stocks are riskier than bonds, but have greater expected long-term returns. Small company stocks outperform larger ones and undervalued stocks outperform growth stocks. When we incorporate these dimensions, we can reduce volatility and improve long term returns.
4. Diversification is critical: Returns of different asset classes are entirely random and holding a few concentrated positions will not, on average, add any additional expected return to the investor. Once a portfolio is designed along size, value and market dimensions, maximizing the diversification within those asset classes reduces risk.
5. Fees matter. Many investors are paying far too much in fees. For instance, two of the same portfolios can have two different rates of return depending on the management expense ratio (MER) percentage.
6. Index investing has its flaws: Funds that mimic underlying indices such as the S&P500, the S&P TSX and the MSCI will underperform the index. Because index funds also charge fees and are continually reacting and paying hidden trading costs to track these markets, they will continually underperform the markets.
7. Excessive portfolio turnover is bad: Every time you or an investment manager trade a stock, there are trading costs, especially the spread between what a buyer is willing to pay and what a seller wants.
8. Long-term discipline is good for you! No one knows for sure when to be in or out of the market. We must establish our asset allocation and stick to the plan through thick and thin, regularly rebalancing to maintain our target portfolio mix.
9. Trust the gurus: Many of the great financial minds of our time believe the best way for most investors to have a successful experience is to have a highly diversified portfolio of low-cost and passive investment strategies.
10. Get help: Work with a financial advisor who understands these truths and can help you stick to a plan.
The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Richard is a senior financial advisor and branch manager with WealthSmart Financial Group/Manulife Securities Incorporated.
