Whether you are an independent investor or a shareholder in investment funds, you have common challenges and some dangers lie in wait for you … You surely know this if you let your emotions guide you in March 2020!
Patience (is not synonymous with laxity)
A portfolio should ideally be rebalanced once a year. If you are accompanied by an advisor, he or she takes care of the lookout between your meetings and he will let you know if a decision is required along the way. If you are managing it on your own, it would be wise to keep a closer eye on your wallet. A 5% deviation from its composition and your starting goals is a signal that a rebalancing should be considered. However, I urge you not to confuse this advice with the myth that a good portfolio has a high turnover rate. Moreover, investments are the only area of my life where I show patience; wish my children would never be jealous of my clients.
Investors who know how to remain patient remain the most favored. In a text I read recently, Ben Graham, a researcher on fundamental equity value research, recalls that anything can happen with short-term stocks and that the shorter the time horizon, the greater the probability. as chance comes into play in your returns is high. For example, even if a company increases its income and profits, its stock price can still decline for reasons other than financial. In the long run, however, if the company maintains profitability, these positive factors will eventually be reflected in its share price.
In the financial markets, the average length of hold of US stocks by retail investors would have fallen from eight years in the 1960s to less than five months in August 2020. Are we not in more of a hurry in all spheres of our life today ‘hui? By only taking into account the short-term profit, we increase the risks: increased costs to invest, more chances of making a mistake and making a mistake, inability to get to know the companies you own and to see them come up. develop. This trend is also seen in investment funds, as the pressure to beat short-term indices is strong.
This impatience of investors therefore increases the risk of excessive turnover in the portfolio. I advise you to watch out for current fads that can make you doubt your long-term position. Warren
Buffett has understood this for a long time. Did you know, for example, that the latter did less well than the S&P 500 index for more than a third of a 52-year period, even if in the end it obtained returns above the index by 11%?
Diversification (not synonymous with scattering)
Asset allocation is one of the elements that most influences the quality of your portfolio, ensuring its return over time while reducing risk. It is based on several elements: asset classes (eg bonds, equities), activity sectors (eg consumer staples, energy), geographic regions. If you are using investment funds, management styles should also be taken into account (e.g. value-oriented versus growth-oriented style) in order to take advantage of the strengths of each style depending on the stage. of the stock market cycle. The major regions of the world must be represented strategically, in particular to take into account the uneven synchronization of global economic growth. A picture is worth a thousand words, here’s one that illustrates the importance of diversifying your exposure to industries to protect your portfolio over the years.
You have accounts in several banks or investment companies and the composition of your portfolio is not necessarily diversified: you risk, even without knowing it, to have increased your exposure to a particular security or sector! In addition, working with several advisers does not facilitate their work of rebalancing and increases the number of follow-up meetings. I often see clients who, over the years, because they have dealt with several intermediaries, have lost sight of the overall objectives of their investment policy.
Be careful, I am not saying that you should not use several investment companies, on the contrary. But it could be advantageous for you to do it through an independent firm. That way, you would only have to get to know and meet with one rep, which would facilitate that big picture.
For individual investors, this diversification is just as important and carries an even greater stake. Indeed, it can be tempting to make a stock selection based on our biases and personal knowledge, which increases the challenge of remaining diversified both in terms of business sectors and geographically. Finally, the use of index funds, or ETFs, also requires taking into account diversification in the composition of the portfolio.
In short, you will all benefit from carrying out strategic diversification, rebalancing it regularly and avoiding getting lost by paying too much attention to ambient rumors.