Did you know that almost one in two people make resolutions at the start of each year?
Unfortunately, according to Professor Richard Wiseman at the University of Hertfordshire in England, only 10% of them achieve their goals. According to him, the key to success is to separate each goal into real and achievable steps in order to offer a greater sense of personal accomplishment. This way, people are more aware of their progress and less vulnerable in difficult times. That's why I thought I'd give you a list of five simple but essential resolutions to adopt when you're an independent investor. To do this, I was inspired, among other things, by significant stock market events of the past year.
Resolution # 1 - Develop an Investment Philosophy
Many people wrongly think that the stock market is a game. In fact, trading stocks has never been easier. First, access to financial information is now possible thanks to technological advances (specialized financial websites, webinars, social networks). Then, barriers to entry are negligible (purchase of a computer, Internet access, transaction fees). Finally, generating returns couldn't be simpler: just buy a stock and sell it for profit! Instead of applying a rigorous investment approach, some investors favor certain high-profile financial vehicles such as Amazon shares, new cannabis production companies or Bitcoin, without a valid reason. It is therefore important to create your own method of analysis to establish your investment strategies.
Resolution # 2 – Stay Invested
In 2017, benchmark indices such as the S&P/TSX, S&P 500, Dow Jones Industrial Average and Nasdaq traded at historic highs, despite potentially negative news such as North Korea's missile tests, the suicide bombing in Manchester, accusations of Russian interference in the US presidential election, Donald Trump's threat to terminate NAFTA and hurricanes Harvey and Irma. Knowing that the emotional pain of a financial loss is greater than the satisfaction of a similar profit, investors tend to sell their shares when this type of episode occurs, which significantly affects their long-term stock market performance. Moreover, a study conducted by BlackRock between 1996 and 2015 showed that the average investor posted an average annualized return of 2.11%, while that of the S&P 500 reached 8.19%! In the stock market, a passive approach – that is, the one of doing nothing – is often the best strategy.
Resolution # 3 – Diversify Your Portfolio
Last spring, Home Capital Group's share price fell more than 80% as a result of allegations of questionable business practices by the Ontario Securities Commission. Although it has regained some lost ground since then, the stock trades below its recent peak, hence the importance of diversifying your portfolio by spreading investments across different stocks, industries and investment management styles. Regardless of the quality and rigor of your investment process, one must recognized that this type of situation is common. Unfortunately few people adhere to this principle of risk management. According to an analysis of the stock market activity of 40,000 discount brokerage accounts, the average number of securities per portfolio is four!
Resolution # 4 – Look for "Bargains" Instead
As you might expect, the phrase "buy low and sell high" is the ultimate goal of any investor who wants to generate a good return over the long term. In general, investors tend to do the opposite, that is, "buy high and sell low". Who has never acquired a stock simply because it had skyrocketed, only to sell it after a sharp decline? It is therefore better to buy during a bearish period rather than a bullish one. For example, between 2000 and 2015, an investor who would have bought the S&P 500 every time the index traded at its highest level in the last 50 trading sessions and kept it for the next 10 trading sessions would have achieved an average return per transaction of 0.14%. Had they opted for a strategy of buying the S&P 500 when it traded at its lowest level of the last 50 sessions, the average yield per transaction would have been 0.50%.
Resolution # 5 – Strive to Keep Things Simple
Over the last 50 years, the S&P 500 has grown nearly 90% of the time outside of a recession. According to Wells Fargo's team of economists, the probability of a recession in the United States in the next six months is 0.20%! This is why we must remain optimistic about the outlook for stock market performance in 2018; to achieve this, it is a priority to stay the course by reducing one's trading activity. Otherwise, you risk unnecessarily hurting yourself. In fact, researchers Barber and Odean analyzed the statements of more than 66,000 investors who had a discount brokerage account between 1991 and 1996. Their objective was to evaluate the number of transactions made and the yield obtained. To the surprise of many, investors in the top quartile in terms of trading activity had an average annual return of 11.4%, compared to 18.5% for those in the bottom quartile.
I invite you to start the year off right with these recommendations. In addition, I encourage you to register for one of the many training programs offered by Desjardins Online Brokerage. Whether it is technical analysis, options or risk management, you will be able to acquire the knowledge, skills and abilities needed to properly establish and manage your investment strategies. Thus, like the benchmark indices, your portfolio could reach new historic highs.