WHY HOT STORIES CAN BURN HOLES IN YOUR PORTFOLIO
One of mankind’s greatest attributes – and perhaps greatest detractors
– is our emotional capacity. Throughout history, this often great
quality has decimated many fortunes.
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I find it intriguing how normally conservative people, who are rational thinkers and who have built successful businesses and careers, jump into stock market investing only to be side-swiped by their two polar emotions: greed and fear.
“Bull market” euphoria coupled with human greed will distort reality, and cause an otherwise rational person to abandon reasonto chase the latest “hot” sector. When markets are down, and “bear market” pessimism sets in, fear can lead you to sell good quality investments at their worst possible time.
Financial newspapers and magazines are chock full of flavour-of-the-day ideas and “must-have” investments. Obviously this sells. But a cool head can keep these hot stories from burning a hole in your portfolio.
In 2003, it appeared that Canada’s 62-cent-dollar was heading ever lower in its value. And since Canada represented a fraction of the world’s economy, the “hot” opportunity was to invest globally. As such, countless investors overloaded their portfolios with global mutual funds. Looking back, this was a grave mistake, as Canadian stocks have since performed among the best in the world and the Canadian dollar has been one of the most secure currencies.
Ten years ago, the hot story was Nortel, then income trusts, energy, resources, real estate, agriculture, and even high-flyer Research In Motion (RIM). All of these will move in and out of favour, and may test your emotional limits, to your portfolio’s detriment.
STRATEGIES FOR MANAGING POLAR EMOTIONS
How does one consistently make money in the emotional world of investing?
By working with a disciplined wealth management practice, which is committed to truly understanding its clients’ emotional triggers and lifestyle needs, you can receive guidance in building the foundation necessary for a successful investment plan.
Market volatility breeds emotional volatility. In order to best manage polar emotions, there are two foundational components that can work together in securing your financial future.
First, it is absolutely necessary your family have a well-thought-out financial plan.
The goal of your financial plan is to determine what personal rate of return is needed for you to achieve sustainable income during your retired years. You should perform a conservative analysis with a range of potential outcomes: consider worst-case, best-case and probable-case scenarios. Make sure that if the worst happens, it won’t devastate your finances.
The second component is to design your portfolio with assets that complement your personal rate of return. More specifically, your portfolio should contain a certain percentage of income assets; such as bonds, preferred shares, blue-chip dividends, power or energy trusts, Real Estate Income Trust (REITs), etc. Income investments are designed to pay cash flow regularly and consistently, regardless of how the market performs. In effect, this continuous cash flow makes portfolio compounding easy, as you can either buy more shares with every dividend, or let the cash balance accumulate and then purchase another income
investment.
INVESTMENT EXAMPLES
Here are two interesting income investments, assuming a personal rate of return requirement of 7.0 per cent. Crombie REIT (CRR.un–TSX) is the real estate division of Sobey’s, and owns most malls where the grocery stores are located. Crombie has a 7.7 per cent current yield and income is paid monthly to shareholders.
Bombardier Preferred Series 4 (BBD.pr.c–TSX) has a 7.0 per cent dividend yield. The shares currently trade at $21.50 and carry a par value of $25.00. Par value is the value you receive if Bombardier decides to redeem this series of shares. This strategy becomes twofold: earn an attractive 7.0 per cent dividend yield while you wait for the potential capital gain from $21.50 to $25.00.
STAY FOCUSED
Your investment success is not a popularity contest – and it doesn’t have to be complicated. Undoubtedly you will hear exaggerated cocktail chatter that Mr. Glee beat the market. Do not let his comments sway you. Stay focused on your family’s required rate of return and stay committed to your plan. Your financial future, lifestyle, and sanity, all depend on it. •
Disclaimer: The comments in this article are for illustration purposes only. Future performance is not guaranteed. The author owns shares in both Crombie REIT and Bombardier Preferred Series 4. Speak with a qualified investment advisor before making any investment.
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