Following basics is best strategy for successful investing
A quote often attributed to Nobel physics laureate Niels Bohr says predictions are very difficult, especially if they’re about the future.
Maybe he had early January in mind when, amid tumbling markets, one expert was convinced a 55-cent dollar was around the corner. Oil would soon be below $10, a recession was imminent. Toronto share prices could end the year with a double-digit loss.
As we near the three-month mark in the year, the economy is picking up steam.
Canadian manufacturing — specifically Ontario’s automotive sector — has roared back to life. Retail sales also surprised, rising in nine provinces after falling in every province in December.
The dollar, after having touched 68 cents (U.S.) in mid-January, opened at 76.40 cents Wednesday. Oil is over $41a barrel. The main Toronto stock index is now up 3.6 per cent year to date, among the better global performers.
TD Economics said Wednesday that it expects more of an export lift because of the dollar and rising U.S. demand. Better things almost certainly lie ahead.
There are a few recurring lessons in this turnaround, but the biggest is that predictions are nothing more than guesses. We tend to treat them as facts, but they’re not.
Economists, fund strategists and investment advisers read the same things and go to the same conferences, and so often form the same opinions.
But nobody can predict the future and what’s already happened isn’t always a good guide.
The problem is that no matter how much you look at the past, it’s the rearview mirror.
This is why mutual fund performance statistics aren’t much help if you’re thinking about buying a certain fund. The statistics measure what has happened, not what will happen.
Occasionally, somebody thinks way outside the box, but it doesn’t always help.
My favourite so far this year: In January, Royal Bank of Scotland economists warned of a cataclysmic year, seeing share prices falling 20 per cent and oil dropping to $16. The bank urged clients to sell everything ahead of a crash.
Everything? Hopefully most of its clients ignored the advice and have found new advisers.
Canadians are among the biggest homebody investors, but they need to get out of town.
Their holdings tend to be concentrated in Canadian companies and Canadian dollars. That has especially hurt with investments in energy and mining, a problem compounded by the dollar’s fall.
Things have improved, but the dollar is always moving and you can’t predict which way it’s heading. Since hitting 68 cents in mid-January, the loonie has posted nine consecutive higher weekly closes against the U.S. currency. That wasn’t in the forecasting cards.
You can also hedge your bets by diversifying across type of industry and geographic location. Going outside the country is also a hedge against the way the dollar moves.
“Diversification is the one free lunch,” Ed Cass, the chief strategist for the Canada Pension Plan Investment Board (CPPIB), told me this week.
The board is the investment arm of the CPP and generates the cash that pays your government pension. Cass is responsible for the CPPIB’s overall investment strategy. The fund has $282.6 billion (Canadian) in assets and is among the global pension giants.
It is also a master of diversification, with two-thirds of its investments outside of Canada.
When it comes to the stock portion of its holdings, only 10 per cent is in Canadian equities. The same theme emerged in a recent interview with Matthew Williams, a senior vice-president with Franklin Templeton Investments.
Williams said many of the firm’s clients are afraid of investing outside of Canada. Many are also keeping a lot of their holdings in cash.
Franklin Templeton’s model portfolio for retirement saving is 60 per cent stocks and 40 per cent bonds. The model invests 40 per cent of the total outside of Canada.
Williams says that of every $1 invested under that plan, 30 cents would be in Canadian stocks, 15 cents in U.S. stocks and 15 cents in international stocks. Another 30 cents would be in Canadian bonds and fixed income, and 10 cents in global fixed income.
Like the federal budget’s investments in infrastructure, this isn’t sexy stuff.
But investing success always comes back to basics: a tolerance for risk, patience, diversification and sticking to a plan.
It’s how the big players do it, and we can always learn from how they behave.
That way you put predictions in their place. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca.