Have you decided to take your investments in hand this year? Excellent resolution!
Whether you’re working with an advisor or choosing to manage your portfolio yourself, here are seven tips to avoid some of the most common errors people make with exchange-traded funds.
We have a tendency to want to make a lot of transactions. That’s a mistake. According to a University of California study that looked at more than 60,000 households from 1991 to 1996, investors who made more frequent transactions under-performed as compared to those who made fewer transactions. The return earned by the 20% of investors who were more active was 5.5% lower than that of the less active investors.
Being well informed about the state of the market is a good thing. But don’t be too impulsive in your decisions. People who are constantly watching the market have a tendency to weaken their portfolios with self-destructive behaviour. When you catch up on the latest market news, make sure you place it within a long-term perspective. Try to be strategic, not reactive.
The most known investment strategy but least effective consists of selling your holdings before they start to drop in value, then reinvesting as soon as the market starts to bounce back. This is a near-impossible strategy to put in place. It’s hard to know when it’s time to buy and when you should sell. In fact, an old Wall Street saying goes, “Nobody rings a bell at the top or the bottom of a market.” History has shown that the market is growing 70% of the time.
It’s well known that investors tend to like funds whose best performance is behind them. Unfortunately, these are often the funds that fall behind within a few years. Rather than hoping for a good return, you would be better to set a target for growth and a limit for losses for each investment, and stick with it!
It is common for investors to be too focused on certain holdings. This excessive concentration can hinder a portfolio: insufficient diversification can lead to excessive volatility. This volatility can make the investor more emotional, and lead them to make hasty, irrational decisions. Remember that if you lose 25% of your portfolio, it will take a 33% return to recover your money. If the loss is 50%, a 100% return will be required!
It’s hard to expect good returns when your holding period is just a few weeks, months or even years. However, holding onto investments for less than 12 months is a common mistake many mutual fund investors make. Patience is often the key to investment success!
If you’re properly diversified, be aware that every year, some of your investments will perform better than others in your portfolio. Avoid looking at isolated investments and concentrate instead on the entire portfolio. That will help you avoid making bad decisions.
Good portfolio management requires good diversification, clear goals
and limitations, patience, and a periodic rebalancing of your
holdings. Because being well diversified requires you to purchase
multiple categories of stocks, we suggest speaking to an
Jean-Philippe Bernard is an advisor for National Bank Financial. National Bank Financial is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). The opinions expressed herein do not necessarily reflect those of National Bank Financial. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The securities and sectors mentioned in this document are not suitable for all types of investors and should not be considered as recommendations. Please contact your Investment Advisor to find out if a security or sector is suitable for you and to obtain more information, including the main risk factors. National Bank Financial is a member of the Canadian Investor Protection Fund.
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