Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Two types of overconfident investors

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I started investing in individual stocks shortly after the Great Financial Crisis ended in 2009. I picked an investing strategy that closely resembled the Dogs of the TSX, buying the 10 highest yielding Canadian dividend stocks. As you can imagine, the share prices of these companies got hammered during the stock market crash so I was able to scoop up shares in banks, telecos, pipelines, and REITs on the cheap.

Stocks came roaring back right away and my portfolio gained 35% by the end of 2009. Investing is easy, right?

It took me a while to figure out that my portfolio returns had less to do with my stock picking prowess and more to do with market conditions, luck, and the timing of new contributions. The rising tide lifted all ships, including my handful of Canadian dividend stocks.

I started comparing my returns to an appropriate benchmark to see if my judgement was adding any value over simply buying a broad market index fund. My portfolio outperformed for a few years until it didn’t. In 2015, I had enough and switched to an index investing strategy. Now I invest in Vanguard’s All Equity ETF (VEQT) across all of my accounts.

Related: Exactly How I Invest My Money

New investors who started trading stocks in the past 18 months have likely had a similar experience. Stocks crashed hard in March 2020, falling 30%+ from the previous month’s all-time highs. Since then markets have been on an absolute tear. The S&P 500 is up 91% from the March 2020 lows. The S&P/TSX 60 is up 70%.

That’s just country specific market indexes, mind you. Since March 2020 individual stocks like Facebook and Apple are up 137% and 155% respectively. Tesla is up 700%. Meme stock darlings AMC and GameStop are up 1,045% and 3,621% respectively.

No doubt, unless they’ve done something disastrous, new investors participating in this market have seen incredible returns so far.

This can lead to overconfidence – when people’s subjective confidence in their own ability is greater than their objective (actual) performance.

Overconfident Investors

Larry Swedroe says the biggest risk confronting most investors is staring at them in the mirror. This is the first type of overconfident investor.

Overconfidence causes investors to trade more. It helps reinforce a belief that any investment wins are due to skill while any failures are simply bad luck. According to Swedroe, individual investors tend to trade more after they experience high stock returns.

Overconfident investors also take on more uncompensated risk by holding fewer stock positions.

Furthermore, overconfident investors tend to rely on past performance to justify their holdings and expectations for future returns. But just because stocks have soared over the past 18 months doesn’t mean that performance will continue over the next 18 months.

In fact, you should adjust your expectations for future returns – especially for individual stocks that have increased by 100% or more. No stock, sector, region, or investing style stays in favour forever. If you tilt your portfolio to yesterday’s winners (US large cap growth stocks) there’s a good chance your portfolio will underperform over the next decade.

The second type of overconfident investor is one who makes active investing decisions based on a strong conviction about how future events will unfold.

Related: Changing Investment Strategies After A Market Crash

Think back to the start of the pandemic. As businesses shut down around the world it seemed obvious that global economies would suffer and fall quickly into a massive recession. The stock market crash reinforced that idea. Investors hate uncertainty, but this time it seemed a near certainty that stock markets would continue to fall and remain in a prolonged bear market.

Markets quickly turned around as central banks and governments doled out massive stimulus to keep their economies afloat and their citizens safe at home. Now it became ‘obvious’ that investing in sectors like groceries, cleaning supplies, online commerce, and video technology would produce strong results. Continue Reading…

5 powerful long-term investment strategies for higher returns

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TSINetwork.ca

Here are five long-term investment strategies that we are certain will enhance your long-term investment results. They’ve long been part of the advice we give in our investment services and newsletters, including Canadian Wealth Advisor, our advisory for conservative investing.

1.) No stock can ever be so undervalued or desirable that it overcomes a lack of integrity on the part of company insiders

We’ve always believed that investors should sell a stock if they have any doubts about the integrity of the people who are in charge of the company. In other words, if you think a company is run by crooks, you should sell the stock right away, no matter how attractive it seems as an investment.

However, to enhance your long-term returns, not just avoid loss, you need to apply this tip in a moderate fashion. You need to distinguish between lack of integrity on the one hand, and naivete or poor judgment on the other. Many public companies unintentionally run afoul of tax rules or regulatory decisions, for instance. If you take that as a sign of low integrity, you can wind up selling sound investments at market lows.

2.) Compound interest — earning interest on interest — can have an enormous ballooning effect on the value of an investment over the long-term

Compound interest can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. This stock trading tip’s benefits apply to both stock and fixed-return, interest-paying investments like bonds. When you earn a return on past returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones: like high brokerage commissions, say. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

3.) As a group, investment long shots are overpriced

If you have nothing but long shots in your portfolio, you are likely to make meagre returns or lose money over long periods, rather than making the high returns you seek. That’s why you need to be particularly cautious and selective when adding anything to your portfolio that offers the potential of high returns. Continue Reading…

GICs with an equity twist: RBC’s latest solution for Canadians looking to grow their savings

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By Flora Do

Vice-President,

Term Investments & Savings, RBC                  

(Sponsor Content)

Remember piggy banks? I sure do. Piggy banks stuffed with loonies, quarters, dimes, nickels and pennies (remember pennies?) My piggy bank helped me save for so many precious purchases when I was growing up.

During those childhood years, my piggy bank was the equivalent of a low-risk savings vehicle (I’d say ‘no-risk’ but it did shatter if dropped).  I knew exactly where my money was and how much I had. The only thing the savings in my piggy bank could not do was grow on their own.

I wasn’t yet an investor; I was a saver. Today I lead a team which helps Canadians to be both, through a solution we’ve just reinvented: the humble GIC (Guaranteed Investment Certificate).

For decades, GICs have been the preferred choice for Canadians looking to invest savings, with the guarantee that their initial investment (principal) would be fully protected.

The market stepped things up by giving some GICs an equity twist – tying GIC returns to the equities markets – for Canadians seeking the security of GICs but looking for opportunities to increase their return potential. As with traditional GICs, an investor’s initial investment is 100% guaranteed. Unlike traditional GICs, equity-linked GICs are connected to stock market performance, linked either to various indexes or a basket of stocks, offering investors potential gains from market returns.

New GIC linked to ESG

Specifically at RBC, this summer we introduced our first GIC based on ESG (Environmental, Social and Governance) factors – the RBC ESG Market-Linked GIC – and our first GIC to track the performance of a customized basket of 20 North American companies – the RBC North American MarketSmart GIC.

Our ESG GIC is a direct response to the growing interest we’ve been seeing among Canadians in looking beyond a company’s balance sheet when making investment choices. If you’re an investor who wants to help make a difference in the world by including ESG considerations in your investment decisions, our ESG GIC is purpose-built for you. It’s linked to a global index of environmentally and socially responsible organizations, all of which must first pass a set of rigorous ESG standards. To be included in the index, each company must demonstrate positive ESG metrics, low carbon impact and strong financial health. Continue Reading…

Managing Finances as a Small Business Owner: Top Tips

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By Emily Roberts

For the Financial Independence Hub

Being a small business owner is challenging at the best of times. With many responsibilities, there is no surprise that many business owners feel negative impacts on their mental well-being and health.

Financial struggles can significantly contribute to the well-being of business owners. Juggling the books to make sure you keep your head above water can be challenging. None more so than in the wake of the pandemic. Businesses big and small have experienced financial struggles in some way; it has not been easy.

Read on to discover some of our top tips for managing your finances as a small business:

1.) Create Detailed Budgets

It goes without saying that knowing your business profits and outgoings is critical to your ongoing and future success. Without this information, your business will suffer. Create a budget for your company as early as possible. Include any outgoings that you will have to pay.

Comparing the outgoings against the money coming into your business will give you a better idea of your financial health as a company. Assess this information frequently, for your income and outgoings will naturally fluctuate over time.

Keeping up to date with any market changes and internal business factors will significantly impact your ability to manage your finances but are not the only means for doing so.

2.) Educate Yourself

Being at the helm of a business means learning something new every day. Whether you learn something through your own efforts or the means of someone else within your company, educating yourself on business practices on a regular basis will go a long way. Continue Reading…

8 things to know before applying for Life Insurance

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What should someone know before applying for life insurance?

To help you prepare for life insurance application processes, we asked insurance experts and business leaders this question for their best advice. From researching the required health tests to budgeting monthly costs, there are several tips that may help you when applying for life insurance.

Here are eight things to know before applying for life insurance:

● Know What Test Might be Done
● Clarify Term Life vs. Whole Life
● Determine Your Why
● Gather Your Paperwork Early
● Check Your Health Prior
● Assess Length of Policy
● Budget Monthly Costs
● Figure Out Future Needs

Know What Tests Might be Done

In the past, my life insurance companies would test for marijuana and reject applications for applicants who tested positive for marijuana use. However, since marijuana is legal in several states, but still illegal at the federal level, it is wise to work with an insurance expert to help work you through the process so you can find the right policy at the best rates to meet your needs. — Chris Abrams, Marcan Insurance

Clarify Term Life vs Whole Life Insurance

Learn the difference between term life insurance and whole life insurance so you can select the option that works best for your situation and budget. Term life insurance is an agreement between you and your insurance provider that lasts between 10-30 years. This type of insurance does not usually require a health exam. On the other hand, whole life insurance is truly meant to last your lifetime and carries additional benefits. However, it is also more costly. Understanding how these policies differ can help you make an educated decision about your life insurance. — Brian Greenberg, Insurist

Determine Your Why

The reasons why you are getting life insurance factor into the coverage amount and type of coverage you’ll receive. This can also help motivate you to stay consistent with payments. Most people who have families that rely heavily or solely on them for financial support and stability might opt to get sufficient life insurance coverage in the event of an unexpected death. Depending on the amount and type of life insurance, you provide an income replacement for your family in your absence. –– Rronniba Pemberton, Markitors

Gather Your Paperwork Early

Before applying for life insurance, it’s important to know what kind of personal information you’ll need to give the company. Some companies require detailed medical records while others just require simple information such as your name, date of birth, place of residence, and social security number. Prepare documents accordingly to ensure there won’t be any surprises along the way. — Tim Mitchum, WinPro Pet

Check Your Health Prior

Before applying for life insurance, you should be aware of your health. If you are rejected for life insurance, you could be affected down the road. You could have trouble getting life insurance from another company. Your credit score could even be lowered. The cost of life insurance could be raised out of your reach due to poor health. Learn if you have a preexisting condition. You can be denied life insurance if you have preexisting conditions. Check on the status of your own health condition before asking a life insurance examiner to look at you. — Janice Wald, Mostly Blogging Academy

Continue Reading…