Road Cents - Could Be­ing A Snow­bird Ac­tu­ally Be Prof­itable For Your In­vest­ment Port­fo­lio?

Snowbirds & RV Travelers - - Contents -

Based on a re­cent study by Fidelity In­vest­ments, the an­swer could be yes. Fidelity looked at all of their clients’ in­vest­ment ac­counts for the pe­riod be­tween 2003 and 2013 with the goal of de­ter­min­ing what type of re­tail in­vestor was able to achieve the high­est re­turns. The re­sult of this study showed that in­di­vid­u­als who had for­got­ten about their ac­counts or had passed away, leav­ing their ac­counts in­ac­tive dur­ing the es­tate process, pro­vided the best re­turns. If we as­sume that while “snow­bird­ing” you are spend­ing more time on the golf course and re­lax­ing un­der the awning of your RV than tin­ker­ing with your in­vest­ment port­fo­lio, then th­ese re­sults should make you happy.

But how is it that the for­get­ful and de­ceased can out­per­form the thought­ful and alive? Much of it re­volves around the growth of the in­ter­net and all-day busi­ness news as in­vestors are now bom­barded with in­for­ma­tion they feel they need to act on. This is ev­i­dent in the av­er­age hold­ing pe­riod of U.S. stocks, which has dropped from seven years in 1960 to closer to one year to­day. This drop in the amount of time in­vestors are will­ing to hold an in­vest­ment be­fore sell­ing it goes against the old say­ing, “it is not about tim­ing the mar­ket but about time in the mar­ket.”

War­ren Buf­fett has said that his hold­ing pe­riod is “for­ever,” and from 1987 to 2009 there were four times when the price of his hold­ing com­pany dropped by 37% or more. Dur­ing th­ese down pe­ri­ods, there is no doubt that me­dia were pre­dict­ing that “War­ren has lost his touch,” and many in­vestors felt the pres­sure to sell and move on. But even with th­ese sig­nif­i­cant pull­backs, an in­vestor who stayed in­vested in War­ren Buf­fett’s com­pany over time, with­out try­ing to time the mar­ket, would have pro­duced mar­ket-beat­ing re­turns. There are plenty of other com­pa­nies that have of­fered in­vestors above-av­er­age growth if only they had the con­vic­tion to ig­nore the short-term noise and fo­cus on the long-term plan.

This short-term fo­cus and de­sire to act also shows up in the av­er­age in­vestor’s re­turns, as noted in a 2015 study by re­search firm DALBAR. This study looked at the past re­turns of mu­tual fund in­vestors in the United States rel­a­tive to the markets, and it showed that the av­er­age eq­uity fund in­vestor un­der­per­formed the bench­mark by a stag­ger­ing 7.27% over the past 30 years. While fees did play a small role in this un­der­per­for­mance, the ma­jor rea­son was psy­cho­log­i­cal fac­tors, ev­i­dent as in­vestors chased per­for­mance and tried to time the mar­ket. This phe­nom­e­non is fur­ther ev­i­denced by a 2014 Morn­ingstar, Inc. study that demon­strated that the av­er­age mu­tual fund gets a bet­ter re­turn than the av­er­age mu­tual fund in­vestor. The rea­sons cited in the Morn­ingstar re­port are very sim­i­lar to the DALBAR one: in­vestors have a bias to buy­ing and sell­ing too fre­quently and in­vest­ing in what per­formed well in prior years. This es­sen­tially leads to buy­ing high and sell­ing low – the ex­act op­po­site of the con­ven­tional in­vest­ing wis­dom.

Hav­ing time in the mar­ket as op­posed to tim­ing the mar­ket has two other po­ten­tial pos­i­tive ef­fects for in­vestors. The first is lower fees – if you are trad­ing less fre­quently, your costs should be lower. The sec­ond, ap­pli­ca­ble only to non-reg­is­tered as­sets, is that you could po­ten­tially de­fer your cap­i­tal gains taxes by re­al­iz­ing th­ese gains later in life and less of­ten. Both of th­ese ef­fects can re­duce out­flows from your port­fo­lio, which can have a com­pound­ing ef­fect over time.

So the next time you are on an ex­tended road trip or tee­ing off on the first hole, you can rest as­sured that you may be do­ing your­self a favour by ig­nor­ing the news and the short­term gy­ra­tions of your port­fo­lio. With any luck, your port­fo­lio may per­form as well as if you had for­got­ten about it al­to­gether!

Michael Woods, CFP, CIM, is a port­fo­lio man­ager with Od­lum Brown Lim­ited

The in­for­ma­tion con­tained herein is for gen­eral in­for­ma­tion pur­poses only and is not in­tended to pro­vide fi­nan­cial, le­gal, ac­count­ing or tax ad­vice and should not be re­lied upon in that re­gard. Many fac­tors un­known to Od­lum Brown Lim­ited may af­fect the ap­pli­ca­bil­ity of any mat­ter dis­cussed herein to your par­tic­u­lar cir­cum­stances. You should con­sult di­rectly with your fi­nan­cial ad­vi­sor be­fore act­ing on any mat­ter dis­cussed herein. In­di­vid­ual sit­u­a­tions may vary. Mem­ber-Cana­dian In­vestor Pro­tec­tion Fund.

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