I haven’t written much lately about behavioural finance - the way in which human psychology makes successful investing more difficult - but a terrific sentence summing up the importance of the topic in a blog post by U.K.-based fund manager and author Joe Wiggins provided a good excuse to revisit the theme. Mr. Wiggins wrote: “The central issue that behavioural finance faces is that – at its core – it is asking investors to stop doing things they inherently and instinctively want to do.”
Mr. Wiggins began with the example of an investor selling a fund with poor recent returns. This might feel satisfying in the moment but extremes in negative sentiment often represent a bottom in investments, and that person selling might be locking in a loss when a recovery is imminent.
The human tendency to feed our egos can also get in the way of portfolio returns. The belief that we are smarter than others leads to strategies with proven low probabilities of success, like market timing. Ego can also lead to getting emotionally attached to an investment idea and refusing to admit it hasn’t worked.
Mr. Wiggins makes the important point that the finance industry encourages our worst tendencies. Finance theory shows that the more transactions an investor makes, the more likely underperformance becomes. Yet financial professionals often encourage transactions because they generate fees. He writes: “Lots of value accrues to turnover, stories, short termism and irrelevant comparisons. When I say value, I mean fees – not performance.”
The author offers five rules of thumb to avoid psychological hurdles to investing.
The first is to avoid behaviours that provide immediate satisfaction. The second is to accept that we are not smarter than the market.
The third tip is to avoid looking at what other investors are doing; the fourth is to accept that markets are extraordinarily complex and, in the end, unpredictable over shorter time frames. The fifth and final rule is to ignore most of what has grabbed your attention in any given day when making investment decisions. This is similar to venture capitalist Morgan Housel’s advice to avoid all news that is unlikely to be relevant three months in the future.
Mr. Wiggins’ column is a useful reminder that our brains did not evolve to invest in markets and in many many ways human psychology is actively working against portfolio returns. When making portfolio decisions, investors must always question whether they are doing what feels right, or what is right based on market history.
-- Scott Barlow, Globe and Mail market strategist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
The Rundown
If pension funds can’t see the case for investing in Canada, why should you?
Ian McGugan says it’s time to ask a rude question: Is Canada still worth investing in? After all, if the Canada Pension Plan Investment Board and other sophisticated investors aren’t overwhelmed by Canada’s investment appeal, why should you and I be?
‘Overdue’ pullback in U.S. stocks to test dip-buyers’ resolve
Reuters reports that the first sharp pullback for U.S. stocks in half a year is leaving investors wondering whether to buy the dip or hold out for more declines. Meanwhile, a selloff in bonds so far in April is prompting some to consider allocating more funds to fixed income to lock in higher yields ahead of interest rate cuts by the Federal Reserve.
Why BCE, Rogers and Telus are all struggling - and their misery is likely to last
A new consensus is quietly forming around Canada’s telecommunications industry – a painful narrative that is putting more pressure on the sector’s sinking share prices. After years of easy wins, cable and wireless companies are trapped in a new era of tepid growth, and there are no easy fixes in sight, writes Tim Kiladze.
I think my adviser may soon retire - what should I do?
Most of a relationship with a financial adviser will rightly focus on your retirement. But your adviser’s retirement plans matter, too. Rob Carrick has some advice on how to handle this sensitive topic.
These four ETFs are posting strong gains in a mixed year for stocks
Gordon Pape outlines four of his exchange-traded fund picks. All have turned in good results so far in 2024 and he still rates them a buy.
How valuation works and why it’s important
Tom Bradley, a member of the Canadian investment industry’s Hall of Fame, drills into how valuation works and why it’s important.
Looking for value stocks? Some lessons from the masters
Norman Rothery summarizes some of the more interesting insights gleaned from the University of Western Ontario’s recent Value Investing Conference.
Bitcoin traders shrug off ‘halving’ to focus on broader market risks
Bitcoin’s so-called halving event has had little impact on its price so far, with industry insiders on Monday saying the cryptocurrency’s fortunes were more closely tied to broader financial market sentiment and geopolitics.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Ted Dixon: G2 Goldfields insiders going for gold in Guyana
Globe Advisor
Portfolio ex machina: How asset managers are embracing AI
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.
Ask Globe Investor
Question: What is your opinion of investing in Canadian depositary receipts (CDRs) for U.S. companies such as Amazon.com, Nvidia Corp. and Microsoft Corp., as opposed to investing in the U.S. stocks directly?
Answer: Like most investing products, CDRs have their pros and cons.
The big advantage of CDRs is that you can buy them in Canadian dollars, which spares you from paying the steep foreign exchange costs that brokers charge for converting your loonies into greenbacks. CDRs are also currency-hedged, which means the value of your investment should be insulated, at least to an extent, from fluctuations in the Canada-U.S. exchange rate.
Another benefit of CDRs is that, because they trade at much lower prices than their respective U.S. stocks, it’s easier to invest relatively small sums of money. As an example, say you have $2,000 to invest in Nvidia, whose shares were trading early Friday afternoon at about US$814 on the Nasdaq Stock Market. After taking the exchange rate into account, your $2,000 would buy a maximum one Nvidia share, leaving you with $850 in uninvested Canadian cash.
With Nvidia CDRs, on the other hand, you could put virtually all of your money to work. That same $2,000 would buy 26 Nvidia CDRs based on Friday’s trading price of about $76.50 on the NEO Exchange, leaving you with just a few dollars of idle cash (depending on the size of the commission).
But there are also some significant cons. Click here to read my full column on the topic.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
Tom Czitron, who managed funds for many years, says it’s time for Canadians to lose their home-country bias. He’ll recommend some ETFs for international stock and bond exposure.
Lower prices, stubborn costs could weigh on copper miners’ quarterly results
Click here to see the Globe Investor earnings and economic news calendar.
Have your TFSA investments topped half a million? Share your story with The Globe
The Globe and Mail is looking to hear from Canadians who have large TFSA balances to find out more about how they accomplished the feat. Click here to find out more about how to participate.
Compiled by Globe Investor Staff