Five things investors keep forgetting
Peter Hodson gives some pointers on how to better your chances of reaping results.
In the stock market, information is key. Many investors, though, have trouble sifting through all the info that is out there.
We’ve found that most information can be ignored, as a lot of it is just noise.
This includes things like analyst upgrades (too frequent, not accurate), “expert” predictions (generally horrible) and many company press releases (not overly meaningful).
Still, some information will of course be extremely useful. Over time, with market experience, you should be able to weed out at least some useless data, giving you more time to analyze what’s really important.
This column is not so much about information, but will focus on five points investors need to, or should, know, but time and again seem to forget. Here goes:
1)
You can earn about $48,000 a year completely tax free
In Canada, thanks to the benefit of the dividend tax credit, you can earn a substantial amount of income annually, completely tax-free, provided that dividends are your ONLY source of income. Many investors with $1 million+ in assets can achieve this level. If additional expenses pop up, these investors simply tap into their TFSA accounts, and replace the amount withdrawn the following year. Of course, you need to have a concentrated portfolio of Canadian dividend stocks to achieve this. If your house is paid for and you don’t have a lavish lifestyle, you should be able to have a decent retirement, all while paying zero in taxes. Something to think about if you have a large portfolio, and are considering stopping working completely.
2)
The stock market is not designed to scam you out of your money
It is surprising how many investors and GIC-refugees have this view. Many people are of the view that the market is “fixed” and stacked against them. This view tends to arise after losses are incurred, as it is far easier to “blame the system” rather than accept the fact that you bought a loser investment. This view, though, will only ensure your lack of wealth. Sure, there are some bad players in the market. There are bad investment bankers, bad deals, and insider trading. But there are also amazing companies that grow year in and year out, compounding your wealth again and again. Take a look at any of the Top 100 Richest People in The World lists. Practically every billionaire on those lists got there from being an investor. Last I checked, there were no GIC investors on any wealthy-people list.
3)
The investment industry plays on your fears to try to get all of your money
The investment industry likes to throw around complicated terminology, come up with structured products and use various jargon to convince you that fund managers and brokers are “experts.” And, as experts, you should be able and happy to pay for advice and knowledge that you don’t have. But this is a crock. Most managers are no better than you are at investing. Most products that are sold by investment companies are designed to capitalize on investors’ fears. When the market is volatile, the fund industry comes out with “low volatility” funds, at a fee. When techs are hot, we see more tech funds being offered. Products are “sold” to clients with high fees to brokers and advisers. Do-it-yourself investing may not be easy, but it will be far more profitable.
4)
It is very tough to run a truly successful public company, which is why you should stick with your winners
While we are sure most public-company executives are trying as hard as they can to improve the fortunes of their companies, it is simply not an easy task. Trying to juggle long-term plans while meeting quarterly earnings estimates is very tough. In addition, competitive companies are trying always to steal your business, customers, and employees. That’s why, when you latch onto the stock of a winner — such as Constellation Software, or Amazon — it is usually best not to sell. Suc- cessful managers tend to remain that way. They don’t suddenly get stupid just because their company stock has already doubled. We highly encourage investors to hang onto their winning stocks as long as they can (still with consideration though to prudent portfolio management regarding position limits).
5)
It’s time in the market that counts
You have heard this one before, but the facts are stark: Time in the market is the most important factor in investment success. A recent study by theirrelevantinvestor.com highlights that, if you missed only the 25 best days in the market in the past 30 (!) years, you might as well have not owned any stocks at all. And of course, the really, really good days in the market typically follow some of the worst days. Thus — as most investors invariably find out eventually — selling after a big market decline is just about the absolute worst thing you can do as an investor. Don’t panic. Put in the time and your portfolio will reap the results.