Achi news desk-
I haven’t written much recently about behavioral finance – the way human psychology makes it harder to invest successfully – but a great sentence summing up the importance of the subject was put in a blog post by UK fund manager and author Joe Wiggins, and a good excuse to revisit the theme. Mr wrote Wiggins: “The central issue that behavioral finance faces is that – at its core – it asks investors to stop doing things that they inherently and instinctively want to do.”
Mr Wiggins started with the example of an investor selling a fund with poor recent returns. This might feel satisfying at the moment but extremes in negative sentiment often represent bottoms in investments, and that person selling could be locking in a loss when a recovery is imminent.
The human tendency to feed our egos can also hamper portfolio returns. The belief that we are smarter than others leads to strategies with a proven low probability of success, such as market timing. Ego can also lead to an emotional attachment to an investment idea and a refusal to admit that 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 there will be underperformance. Yet financial professionals often encourage transactions because they generate fees. He writes: “Much value is derived from turnover, stories, short term and irrelevant comparisons. When I say value, I mean fees – not performance.”
The author offers five general rules to avoid psychological barriers to investing.
The first is to avoid behaviors that provide instant gratification. 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 extremely complex and, in the end, unpredictable over shorter time periods. The fifth and final rule is to ignore most of what has caught your attention on 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.
The column of Mr. Wiggins helpfully reminds us that our brains did not evolve to invest in markets and in many ways human psychology actively works 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
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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?
A ‘late’ pullback in US stocks to test the resolve of dip buyers
Reuters reports that the first sharp rebound for US stocks in half a year left investors wondering whether to buy the dip or hold out for more declines.
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 profits, cable and wireless companies are trapped in a new era of tepid growth, and there are no easy solutions in sight, writes Tim Kiladze.
I think my adviser may retire soon – what should I do?
Most relationships with a financial advisor will be appropriately focused on your retirement. But your adviser’s retirement plans are important too. Rob Carrick has advice on how to handle this sensitive subject.
These four ETFs post strong returns in a mixed year for stocks
Gordon Pape outlines four of his exchange traded fund picks. All have delivered good results so far in 2024 and still give them a buy rating.
How valuation works and why it matters
Tom Bradley, a member of the Canadian investment industry Hall of Fame, investigates how pricing works and why it matters.
Looking for value stocks? Some lessons from the masters
Norman Rothery summarizes some of the more interesting insights from the University of Western Ontario’s recent Value Investing Conference.
Bitcoin traders are refusing to ‘halve’ to focus on wider 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 are more closely linked to broader financial market sentiment and geopolitics .
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday analyst upgrades and downgrades
Ted Dixon: G2 Goldfields insiders go for gold in Guyana
Globe Advisor
Councilors are rushing to overhaul tax strategies after Ottawa’s surprise change to the capital gains inclusion rate
Portfolio ex machina: How asset managers are embracing AI
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Ask Globe Investor
A question: What do you think about investing in Canadian depositary receipts (CDRs) for US companies such as Amazon.com, Nvidia Corp. and Microsoft Corp., rather than investing in the US stocks directly?
Answer: Like most investment products, CDRs have their pros and cons.
The big advantage of CDRs is that you can buy them in Canadian dollars, which saves you from paying the steep foreign exchange costs that brokers charge for converting your loonies into greenbacks. CDRs are also currency hedged, meaning that the value of your investment should be insulated, at least to some extent, from fluctuations in the Canada-US exchange rate.
Another advantage of CDRs is that, because they trade at much lower prices than their respective US stocks, relatively small amounts of money are easier to invest. For 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 at most one Nvidia share, leaving you with $850 in uninvested Canadian cash.
With Nvidia’s CDRs, on the other hand, you could put almost all 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 only a few dollars of idle cash (depending on the size of the commission).
But there are also some significant disadvantages. Click here to read my full column on the subject.
-John Heinzl (Email your questions to [email protected])
What’s up in the coming days
Tom Czitron, who managed money for many years, says it’s time for Canadians to lose their home country bias. He will recommend some ETFs for international stock and bond exposure.
Lower prices, stubborn costs could weigh on copper miners’ quarterly results
Click here to view Globe Investor’s earnings calendar and economic news.
Have your TFSA investments reached half a million? Share your story with The Globe
The Globe and Mail is looking to hear from Canadians with large TFSA balances to find out more about how they accomplished the feat. Click here to find out more about how to get involved.
Compiled by Globe Investor Staff
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