All posts by Adrian Mastracci

Are you suffering from investing bias?

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Overview

Situation: Nobody is immune from the adverse ramifications of investing bias.
Symptom: Left unchecked, your bias can inflict long-lasting portfolio damage.
Solution:  Recognize your biased patterns and muster up willpower to change.
Summary:  Stop emotional attachments and adopt rational decision making.

“The art of being wise is the art of knowing what to overlook.”
— William James (1842 – 1910) American psychologist and philosopher.

Our investment behaviours are dramatically influenced by the bias we keep. Left unchecked, bias can inflict long-lasting portfolio damage, such as lower returns. The goal is to become aware of how bias affects the outcomes of investing behaviours. My challenge is extended to all investors.
Bias has many definitions, such as, “a preference or an inclination, especially one that inhibits impartial judgment.” Too many portfolios are devastated by various signs of biased investing. Resolve to unravel the consequences of biased investing to regain a portfolio with purpose.

Recognize and make adjustments to bias that is holding back your money management. Step out of your comfort zone and revisit your biased behaviours. All investors can resolve to make simple and sensible bias alterations. This process helps us become better investors.

Nobody is immune from the adverse implications of investing bias. Researchers point out that our brains are wired with many preset investment bias, professionals included. Thankfully, the wiring is easily changed. In addition, portfolio managers devote plenty of effort in minimizing the affects of bias found in client portfolios.

Delving into a few amusing behaviours of investing is a fascinating subject. My favourite is the impatience bias that grandmas and grandpas don’t have.

Change this wiring soon

I highlight a few important biases for you to recognize and change:

• Over-confidence bias: The most common investor bias by far is over-confidence. That is, believing that we are more savvy and wise about particular investment strategies than we actually are. Over-confidence often leads to quick decisions that we later regret. For example, investing too much money into one or two “surefire” stock selections.

• Confirmation bias: Investors have built-in desires to find facts, figures, data, trends, information, people and institutions that agree with their existing views. Then they ignore all the other people and data that contradict existing beliefs and positions. Does it sound close to home?

• Recency bias: Your next investment decision can be unduly influenced by the outcome of your last trade. You are more receptive to investing if you just realized a gain, versus if you realized a loss. Regardless of whether or not the investment climate is right for you.

• Impatience bias: Have you noticed that grandmas and grandpas seldom get mad or annoyed for very long with their grandchildren? In contrast, the children’s moms and dads may reach the hot point with the same children much sooner. This observation also applies to their investment portfolios. Those grandmas and grandpas have more patience with portfolio outcomes, versus their sons and daughters. Consequently, the moms and dads reach more emotional resolutions and/or fewer logical decisions than grandmas and grandpas. This is an easy one to correct. Continue Reading…

What the Olympics can tell us about managing Retirement portfolios

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Adrian Mastracci, “fiduciary” portfolio manager at Lycos Asset Management touches on applying Olympian wisdom to your retirement portfolio.

Let’s reflect on the Olympians who recently competed at Tokyo. They deserve praise for braving years of preparation, training, commitments and pandemics.

Striving and competing to be best in their chosen pursuits. Regardless of outcomes.

I especially appreciate long distance events like cycling, running, swimming and rowing. They demand a wealth of endurance and perseverance, much like retirement portfolios.

Athletes often have to reach down deeper to muster more bursts of adrenalin. Just when it seems there is little, if anything, left in the tanks.

My top takeaways

Investors can draw some parallels from hard working Olympians. Wisdom from the Olympiad is relevant and applicable, particularly to long-term investing.

I summarize my top takeaways. Successful athletes require:

• Much dreaming and sketching out of personal goals.

• Setting specific, well thought out strategies.

• Disciplined game plans that realize on their dreams.

• Patience for the roller coaster of setbacks and achievements. Periodic tweaking of their action plans.

• Time horizons to learn and master their quests.

Olympians make wonderful ambassadors for the investing profession. I encourage investors to take a few moments and apply Olympian wisdom to the precious nest egg.

Athletes make choices and sacrifices along the way in their quest for Olympic goals. Investors balance choices between spending for the moment and saving for the long haul.

Risk is an inevitable part of the Olympics, as it is in long term investing. Athletes try different training plans, much like investors try a variety of strategies.

Investors can improve their long term portfolios with these four pearls of wisdom:

  •  Pay attention to issues that you can control:  risks, diversification, asset mix and investment quality.
  •  Ensure that no investment can cause serious portfolio damage: losses are typically your biggest destroyers of wealth.

Buy and sell methodically over time – timing the markets is a low percentage strategy.

Always expect the unexpected – a positive mindset is best for making portfolio decisions. Stick to simpler game plans. Skip the fancy moves.

All the very best to the athletes. May they treasure the accomplishments and cherish the memories.

 

Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the advisory profession in 1972. He is portfolio manager with Vancouver-based Lycos Asset Management Inc.  

 

 

 

Information provided is intended for educational purposes only. Copyright ©2021, Adrian Mastracci. All rights reserved.

Stickhandling your investing amid fear and greed

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“The fishing was good; it was the catching that was bad.”
— A.K. Best, fishing author.

“Stock markets are swimming in the face of two major investor emotions. They are fear and greed.” — Adrian Mastracci, fiduciary portfolio manager.

All you have to do is rewind to the 2020 investment results. Especially those recorded during the months of February, March and April. They brought new meaning to volatility, in both directions.

Mention 2020 and practically every investor is glad it is in the rear view mirror. Tread carefully as those pesky markets are not known to march to your wishes.

Accordingly, I attempt to highlight some basic ideas that help in portfolio construction. Focus on expanding your knowledge, say of at least three strategies that improve your nest egg.

Each day now brings a new crowd of market optimists and pessimists. Along with various assortments of buyers and sellers. Just playback the last two weeks.

Be aware of the implications in both camps. Successful investing is about stickhandling one’s comfort zone between fear and greed.

Rules to live by

So, rule number one. No knee-jerk reactions please. Regardless of whether you’re buying or selling.

Rule number two. Markets operate on logic. Do you?

If you succeeded with these two rules, step aside and breathe. If not, rewind to rule one. The bigger question is why would you want to?

Some investors may seek to calm their fears by preserving capital. Others prefer to chase their greed by hitching onto growth wagons du jour.

A few more pessimistic data releases could drive the markets lower. Conversely, a few more ounces of optimism could propel investor confidence to higher levels. Continue Reading…

RRSP playbook for 2021 planning

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Overview
Situation: Investors have plenty of questions about benefits of RRSPs.

My View: RRSPs provide significant value to retirement game plans.

Solution: Master how RRSPs deliver steady, sensible accumulations.

This is the time of year when I propose that you focus on “Planning Strategies 360°.” That is, your big picture. For example, review what is best for your family. Keep close tabs on your total nest egg. It’s too easy to become preoccupied only with RRSPs.

First, a few highlights about my overall approach:

  • I recommend growing the RRSP wisely and sensibly over the long haul.
  • Refrain from placing portfolio performance in top spot among your priorities.
  • Never lose sight that your primary mission is to manage investment risks.
  • Your goal is arrange streams of steady income during retirement decades.

RRSPs have grown substantially, many approaching $1,000,000 to $2,000,000 per account holder. Also consider that some investors own the RRSP’s financial cousin, a flavour of the Locked-In Retirement Account (LIRA). This is typically created when the commuted value of an employer pension is transferred to a locked-in account, resembling an RRSP.

Today’s LIRA values can easily range from $300,000 to $600,000. Although RRSP deposits cannot be made to a LIRA, the account needs to be invested alongside the rest of the nest egg.

Understanding RRSPs is essential to the multi-year planning marathon. RRSPs really fit like a glove for two camps of investors. Those without employer pension plans and the self-employed. Pay attention to how the RRSP fits into your family game plan. The power of tax-deferred compounding really delivers. Keep your RRSP mission simple and treat it as a building block. Take every step that improves the money outlasting your family requirements.

I summarize your vital RRSP planning areas:

1.) Closing 2020

Your 2020 RRSP limit is 18% of your 2019 “earned income”, to a maximum of $27,230. This sum is reduced by your “pension adjustment” from the 2019 employment slip. The allowable RRSP contribution room includes carry-forwards from previous years.

RRSP deposits made by March 01, 2021 can be deducted in your 2020 income tax filing. There is no reason to wait until the last minute where funds are available. Your 2019 Canada Revenue notice of assessment (NOA) outlines the 2020 RRSP room.

My table illustrates the progression of annual RRSP limits:

Tax Year RRSP Limit Earned Income Required*
2018 $26,230 $145,700 in 2017
2019 $26,500 $147,200 in 2018
2020 $27,230 $151,300 in 2019
2021 $27,830 $154,600 in 2020

 * Figures rounded

2.) Sensible strategies

I can’t emphasize enough to always treat the RRSP as an integral part of the total game plan, not in isolation. Become familiar with how the RRSP fits the family objectives before designing your game plan. A retirement projection is a great starting tool. It estimates saving capacity injections, necessary capital and investment returns for the family.

RRSP deposits don’t have to be made every year. Unused RRSP room can be carried forward until funds are available. RRSP deposits can be made in cash or “in kind.” I suggest sticking to cash. You can also make an allowable RRSP deposit and elect to deduct part or all in a future year. Ensure that all your beneficiaries are named.

Borrowing funds to catch up on RRSP deposits has saving capacity implications. Ideally, keep loan repayment to one year and apply the tax refund to it. Especially, when contemplating an RRSP loan for multiple years. Note that RRSP loan interest is not deductible.

3.) Spousal accounts

RRSP deposits can be made to your account, the spouse, or combination of both. A family can also make all deposits to one spouse and later switch to the other. Spousal RRSPs play a key role in equalizing a family’s retirement income. Particularly, in cases where one spouse will be in a low, or lower, tax bracket during the family’s retirement.

The contributor deducts the spousal RRSP deposit while the recipient owns the investments. Spousal deposits are not limited to the 50% rule for pension income splitting. A top family goal is to achieve similar taxation for each spouse during retirement. Splitting of income that qualifies for the $2,000 pension credit also helps.

4.) RRSP investing

Begin by coordinating your RRSP investing approach with the total portfolio. One RRSP account per individual, plus a spousal where applicable, should suffice for most cases. Be aware of plan fees if you own more than one account.

Never place tax provisions ahead of sensible investment strategies. If investments don’t make sense without tax enhancements, look elsewhere. Investment income earned in RRSP accounts is tax-deferred until withdrawn. All funds received from an RRSP are fully taxable, like salary.

“Location” of investments in your accounts is important. For example, stocks may be better held outside RRSPs. There is no favourable tax treatment of Canadian dividends, gains or losses in RRSPs. Further, the dividend tax credit is lost as it cannot be used in RRSPs. Continue Reading…

7 timeless strategies investors need to remember in this time of market turmoil

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The world as we knew it suddenly changed. What a surprise beyond belief for all of us.

There was no announcement six months ago. There was no new or updated playbook for any of this upheaval.

A harsh pandemic is a sure way of turning lives upside down. Treacherous times are firmly entrenched as the new roadway.

Stock and bond markets march at will in both directions. Investors wonder whether they are closer to a market bottom or to a top. All sorts of fears and worries are sprouting everywhere.

This is a reminder for all to go slow: younger and older, novices and seasoned. Try your utmost to use all the investing common sense you can muster. Sitting on your hands is often a worthy move.

My strategies:

Accordingly, I have selected seven timeless strategies that every investor ought to be familiar with in detail. They form a solid foundation for guiding the family nest egg.

I’ve kept them brief and to the point for the sake of simplicity. Here is my summary of critical strategies:

1). Short term trading is best suited for your “speculative” money. Conversely, long term investing is the best fit for your “serious” money, such as funding retirement. These two portfolios are constructed differently, so don’t mix them.

2). Chasing returns has been far from a consistent winner. Instead, pay attention to acquiring broadly diversified “quality” investments. These portfolios typically fare better during bouts of market turmoil.

3). Set aside the could’ve, should’ve and would’ve schools of hindsight. Make your decisions based on available information and move forward. Looking back in your rear view only creates distractions you can’t do anything about.

4). Becoming attached to your stocks is akin to making emotional decisions. Instead, I recommend pursuing logical moves designed to embrace your best interests. Your investing success should improve.

5). Don’t make investment decision out of fears. Rather, wait until the coast begins to clear. You have absolutely no control over what happens to market fears.

6). Decide whether you seek the return “of” your money, or the return “on” your money. That strategy sheds light on the fit of your desired portfolio. It also keeps you better invested within a more comfortable asset mix.

7). Investing your money all at once is usually not a preferred strategy. Studies show that asset mix delivers the biggest impact on portfolio outcomes. Neither superior stock selection, nor timing of purchases are close seconds.

My premise:

My premise is that investing strategy need not be complicated. I recommend that the main ingredient is always plenty of patience combined with common sense. Focus on logical and sensible approaches that contribute to your discipline. Continue Reading…