Jan. 28, 2022 "Five so-called rules for younger investors that need a reality check": Today I found this article by Peter Hodson on the Financial Post:
We’re getting a few questions from customers lately on how a young person should start investing. It is, of course, ironic that these questions are coming in the midst of a giant stock-market correction, one of the fiercest, and one that’s making even seasoned investment professionals quake with fear. But we love it. The best time to invest is when everyone else is panicking.
Young people flock to the shopping mall when there is a sale (well, they used to, pre-pandemic), so why not flock to the stock market when it is on sale?
There are dozens and dozens of suggestions one could make to a new young investor. Some are good, some are bad, some are conflicting. Let’s look at five and put them through the grinder.
Always keep six months of cash on hand for emergencies
This rule can make sense when you are older and have a lot of fixed expenses and/or a mortgage. But young investors don’t generally have a lot of excess cash in the first place. If you have a big cash cushion on hand for emergencies, it’s not very likely you will have much left over for investing.
Assuming a young adult has a job, we would skip this so-called rule and start investing as early as possible. The best time to invest, as they say, is yesterday.
This cushion-of-cash rule can also be a bit relaxed these days, because there are 11 million job openings in North America right now. If a new investor loses their job for some reason, they are likely going to be able to find another one, very quickly.
Avoid advisers and high fees at all costs
This rule is tricky for us, since our company specifically helps DIY investors, and adviser fees can indeed be a big drag on a portfolio’s performance.
But we would rather see a young investor work with an adviser in order to position themselves properly than see them make all sorts of mistakes in their early investing days.
If a young investor wants to go out on their own later, then fine, as long as they have learned the basics and understand the market more. We have seen too many new investors gamble, make mistakes and then never return to the market and never reach financial security. If an investment adviser helps them stay in the game then we are all for it.
You are young, so use leverage to maximize returns
Um, no. We have seen this rule a few times, the idea being that a young person has the time to stick with investments and get good long-term returns.
A young investor also tends to grow their income with time. Thus, leverage can increase returns and can be covered if things go south for a while.
But we think this is a horrible idea. Using leverage to buy investments when starting out is only going to stress young investors out more. Trust me. I once (at 23, after the crash of 1987) had to cover a margin call with a credit card.
Leverage can be a wonderful thing when the market is rallying, but it can be downright deadly in a downturn.
We would never suggest using debt for a young investor just starting out.
Invest in what you know
We don’t mind this rule, but it can’t just be applied willy-nilly. If I followed this advice in the ’90s, I would be stuck with a bunch of worthless Blockbuster Video shares today.
Young people can identify trends amongst their peers, but this does not always translate to investment success.
Homework is needed, and young investors may not be so good at doing their homework. But it can certainly work at times: my two daughters loved Aritzia Inc. stores, so we covered the company, and that stock has tripled in the past three years.
Buy the dip
This is not the best advice for young people, which might seem contradictory if you recall our opening paragraph that suggested buying stocks when they are on sale. But it is not. Buying the dip is essentially just another form of market timing.
Dip buyers are assuming the market will bounce after the dip. It may, it may not. But it is a form of timing, nonetheless, and we absolutely do not think investors should attempt to time the market.
We would change this bit of advice to “buy consistently.”
Invest every month,
every quarter,
whatever you can,
at regular consistent intervals, with consistent purchases.
When the markets drop, your investments will buy more (exchange-traded funds, stocks).
When the markets are high, your dollars don’t go as far. It turns volatility into your best friend, rather than something to fear.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
Five so-called rules for younger investors that need a reality check | Financial Post
Buying the dip on the way down is a totally different beast than buying the dip on the way up. What are the odds of a severe market correction Play the odds
Aug. 8, 2022 "What advisors are doing (or not doing) with their own portfolios in this bear market": Today I found this article by Renee Sylvestre-Williams on the Financial Post:
The stock market is known for its ups and downs, where investments might see good returns before trailing off, or vice versa.
The “bull market” is a market where there are increases in value of 20 per cent or more over a minimum of two months.
As expected, due to rising inflation, we are currently in a bear market, where there are value drops of over 20 per cent on stocks.
As an investor, a bear market is a key time to consult with financial advisors and planners to find out what can be done to mitigate the effects on your portfolio.
Some advisors are also investors, who are personally affected by market shifts, and even more in tune with how to help their clients. We spoke to four advisors across North America to ask them what they’re doing with their own portfolios and what they’re telling clients.
The answers were varied but all four advisors have common lessons that any investor can use to navigate the ups and downs of the market.
Long-term outlook
Elke Rubach, president of Rubach Wealth in Toronto, Ont. isn’t looking at her portfolio because she’s a long-term investor focusing on the next 10 to 20 years and her portfolio is “really boring.”
“I’m not high risk. I didn’t go out and buy Bitcoin to begin with,” she says. “My portfolio is
diversified between [commercial and personal] real estate,
insurance and funds
that are already diversified, some are up some are down but it’s not money I need right now.”
Higher-risk investments
Herman Thompson Jr., a financial planner with Innovative Financial Group in Atlanta, Ga. says he checks his portfolio when he makes a trade.
“It would be hypocritical of me to tell my clients I know what they’re invested in but I don’t know what I’m invested in.”
Thompson is continuing his strategy of dollar-cost averaging:
putting a certain amount of money into the market every month.
Some goes into his 401K or into investments. Since the markets are on sale, he’s taking a few more risks with his purchases.
“What I’ve done in my dollar cost averaging is to actually turn the volatility up. I want to be buying the riskiest stuff that I can buy right now because it’s been hurt the most.”
One of those risky funds is with an investment bank that has a mutual fund company. Thompson says this bank has “the best growth managers in the world,” and since they’re down 40 per cent for the year, he’s buying into the fund every month.
Other than that, he’s keeping a strong cash position for his short-term investments.
Keeping things the same
Then there are advisors who lay it all out there online. Robb Engen, a fee-only financial planner and co-founder of Boomer & Echo in Alberta, recently wrote a blog post called, “How I invest my own money.”
“I wanted to show how your financial or your investment strategy shouldn’t change based on the current market conditions,” he says. “It should be something that you can stick to for the long term.
In my case, what that means is that I’m not chasing what’s doing a little bit better and I’m not panicking when things are not going as well.”
Like the other advisors, his portfolio is diverse.
He’s currently invested in Vanguard’s VEQT ETF, which has 13,000 stocks all across the globe bundled into one product.
That way, it’s harder to see each individual stock so there’s less chance of worrying over the poorly performing ones. He’s also holding some cash in a tax-free savings account to supplement his downpayment on a new house.
Staying the course
John Sacke is an investment advisor and portfolio manager with BMO Nesbitt Burns in Toronto, Ont. He doesn’t manage his own portfolio,
“I find the emotional attachment one has of one’s own money, sways your bias.”
However, Sacke l makes five trades a year that make up less than three per cent of his portfolio, mostly for fun.
Sacke has 85 per cent in equities and 15 per cent in fixed income such as bonds and preferred shares. He’s not worried about the dip in the market because history has shown that it will recover and often surpass previous earnings.
Key takeaways
When it comes to advice on dealing with bear markets, all the advisors were on the same page:
- Don’t react emotionally and pull your money out of the market because markets move in cycles and what goes down will go back up.
- Don’t attempt to time the market, instead, as Rubach says, “It’s time in the market, not timing the market.”
- Understand your risk tolerance. That way, you’re not making risky purchases in your portfolio.
- Have a diversified portfolio. That way, lower-performing assets will be balanced by better-performing ones.
- If you’re not sure, work with an advisor. “Pick an advisor you trust and one who loves working with people,” says Sacke.
When it comes to bear markets, no one is losing sleep over it. As Sacke says, “I might look at my portfolio late at night when I can’t sleep. I’m not worried about my money, I just don’t sleep very well.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
What are advisors doing (or not doing) with their own portfolios in a | Financial Post
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