Canadian Focus Investors
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Beware of Self-Serving Advice
Advisers traditionally earned their income from selling financial products rather than providing unbiased, holistic financial planning.
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Preet Banerjee
Preet Banerjee a behavioural financial researcher and a consultant to the wealth management industry. As he explains, whether or not you decide to manage your investments on your own or retain a financial advisor, you should certainly undertake due diligence when dealing with the financial institutions and advisors who manage your investment accounts.
You should understand that most financial advisors' compensation and career advancement is based partly or entirely on their success in selling the mutual funds or exchange traded funds that are managed by their employer. As a consequence, most advisors will attempt to pursuade you to buy the mutual funds or exchange traded funds managed by their firm.
The most common reasons advisors give for investing in managed funds, are discussed in the following sections. If you have or are willing to acquire some basic knowlege about business finances and investing then, as explained below, their reasons may not be applicable. Moreover, by taking control of your investments, with or without the assistance of a financial advisor, you should be able to outperform the majority of mutual funds and exchange traded funds, by a wide margin.
Investing is Complicated and Difficult
Financial advisors will often tell you that investing in stocks is complicated and should not be attempted by anyone who does not have the necessary qualifications and experience. Furthermore, you will be told that managing an investment portfolio requires careful monitoring of rapidly changing and unpredictable market conditions so that your investments can be adjusted to ensure maximum returns.
In fact, any reasonably intelligent person should be able to manage their investment portfolio successfully, provided they are willing to acquire a basic understanding of business finances, so that will have the ability to select and monitor the financial performance of 5 to 10 financially successful companies that have a history of paying growing dividends.
If you are just starting to invest in individual companies, you should begin gradually by investing just a small fraction of your savings. You can then increase the number of companies in your portfolio and the funds you invest, over a period of one to two years, as you gain experience and confidence.
Earn Capital Gains by Buying Low and Selling High
If you read the financial news or watch business channels on television, you will discover that the industry is focused on and constantly discusses the fluctuations of the stock markets and the share prices of individual companies. It is no surprise then, that you will find yourself doing the same. Understand that the reason that the media pays so much attention to the gyrations of the stock market is simply because day they must attract the attention of as many readers as possible if they are to survive.
Many traders and financial experts pay close attention to stock prices because they hope to earn capital gains, by buying shares at a low price and selling them when the price rises. Research studies have shown that, while a few of these traders are successful, the vast majority of those who attempt to earn capital gains by buying and selling shares lose money. Your odds of earning capital gains are about the same as your odd of beating the house in gambling casinos. If you really want to gamble with your money, go to the nearest casino where at least they serve you free drinks.
If you follow a strategy of buying financially successful companies that have a history of paying and growing their dividends, you can safely ignor share price fluctuations and the stock markets. As a dividend investor, you only need to review, once or twice a year, the financial performance of the small number of financially stable businesses you hold in your portfolio, to confirm that they are expected to continue to be financially successful into the the foreseeable future.
Share prices and stock market gyrations are of little importance to dividend investors and can be safely ignored, except if the share price of one of your favourite companies falls to an attractive value. As our mentor Warren Buffett famously said, "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Good advice.
You Should Diversify Your Holdings
It makes intuitive sense to diversify your investments, so that if one of the businesses you own unexpectedly fails, your loss is limited to a small fraction of your savings. The issue then, is not whether or not you should diversify your investments, but rather, what categories or types of securites should be in your portfolio, and how many securites should you hold in each category.
Most financial institutions recommend that investors hold a broadly diversified portfolio that includes three categories of investments: 1) cash or cash equivalents (such as money market funds); 2) fixed income investments (bonds, Treasury Bills, or GICs) and; 3) equity investments (common shares of public companies). In this latter category, many institutions recommend that your equity invesments be further diversified among 50 to 100 different public companies headquartered in different countries.
Clearly it would be impossible for most people to effectively manage a portfolio which contained such a large number and variety of investments. Therefore the only practicle option is to buy mutual funds or exchange traded funds (ETFs). However, academic studies have shown that the majority of managed funds underperform their respective stock market indices and therefore many financial experts recommend that investors simply buy a low cost ETF that emulates one of the benchmark indices, such as the S&P/TSX Composite Index or the S&P 500 Index. This approach guarantees that you will always match the performance of the overall market.
The disadvantage of investing in an ETF index fund is that your annual dividend income will be minimal, because index funds contain a large number of companies, many of which do not pay a dividend. The adjacent chart compares the dividends paid each year by the iShares XIU fund (which emulates the S&P/TSX Composite Index), with the dividends paid by my focus investing portfolio. For this comparison, it was assumed that in both cases, $100 was placed in each portfolio at the beginning of 2010 and no additional funds were contributed to either portfolio, except that in both cases, the dividends paid into the respective portfolios were reinvested.
The chart shows that the $100 invested in the iShares XIU fund at the start of 2010, paid a dividend of $2.50 at the end of 2010, which gradually increased each year to about $5.00 by the end of 2023. In contrast, my focus investing portfolio paid a dividend of $5.50 at the end of 2010 which gradually increased to $22.00 by the end of 2023.
The results presented in the foregoing chart demonstrate that you can achieve a significantly higher dividend income, by carefully selecting and investing in the common shares of 5 to 10 businesses, that have a record of paying growing dividends and that can reasonably be expected to continue growing their dividends into the foreseeable future. I
You Should Rebalance Your Portfolio Holdings
Traditionally, rebalancing your portfolio means that if you have company whose share price is growing much faster than the share prices of your other holdings, you should sell some portion of the faster growing company and use the proceeds to buy more of your slower growing investments, in an attempt to have the market value of each of your holdings grow at about the same rate. Rebalancing in this way defies common sense. As Warren Buffett explains, rebalancing your holdings in this way defies common sense. It is like trading Michael Jordan to another team because he is scoring more baskets than the other players on the team.
As a dividend investor, the movements of a company's share price, relative to your other holdings, are generally irrelevant, as is the relative market value of your holdings. If the share price of one of your companies is increasing because the dividend payments are growing faster than the dividends of your other holdings, then you might consider buying more shares of that company, but only if the share price falls to an attractive value and the companies financial success is expected to continue.
1. Banerjee, P., 2025. Is your adviser buying investments that suit their wallet better than your retirement? Three questions to ask. The Globe and Mail, Toronto, ON, March 23, 2025.