Pattie Lovett-Reid: Improve your odds of investing success by thinking like the pros
No one invests with the expectation they will lose money, and when markets are headed higher, we tend to have a higher tolerance for risk.
Understandably, there can be a tendency to panic and move to the sidelines during periods of volatility, especially if you see an investment drop below your purchase price. The reality is this does happen, and market volatility can leave you with a pit in your stomach – whether you’re a veteran or first-time investor.
The old adage “don’t put your eggs in one basket” – or in this case, “don’t have all of your investments in one place,” can often be overlooked by a novice investor dipping their toe into the market. When you put your money, hopes or future into one thing, it can create a certain level of anxiety and lead to sleepless nights over fear you might lose everything.
So what can you do to improve your sleep quality and increase your odds of making money in the market?
To start, you might want to think and act like the pros do by taking the following steps.
1. Ensure you have an investment policy statement. This is your road map. The document will outline your goals, objectives, time horizon, risk tolerance, asset allocation (that is, the distribution of your money across cash, bonds, stocks or even alternative investments like infrastructure). Concentration risk can be a concern, and a way to manage that risk is to limit exposure and keep investments to a maximum of five per cent in one holding. For some, even five per cent may be a stretch, depending on the size of your portfolio. Your statement should really only change if there is a significant life changing event such as retirement, the sudden death of a loved one, the birth of a child, changes to the tax code, coming into a windfall, or even getting out of debt.
2. Be realistic about your timeline and risk tolerance. That, in turn, will drive your asset allocation. Your timeline should always be longer than you think. If you are 60, you may think 20 years is reasonable. However, I would argue your time horizon should be 40 years in that case because no one wants to run the risk of outliving their money. When it comes to your risk tolerance, have a very clear picture on not only what you might be willing to lose but also what you can afford to lose.
3. When it comes to diversification, get out of Canada. Canada only represents roughly four per cent of the global equity market. There is simply too much opportunity outside of this country to ignore.
When you put a process into place, it can take some of the emotion out of investing by reducing the odds you will buy high and sell low.