Canadian Focus Investors
Beware of Poor Advice
Investment managers are nothing more than fortune tellers or astrologers
who are dragging money out of their clients' accounts.
1
Charlie Munger
Some investing recommendations are repeated so often by financial institutions and advisors, that many people consider them to be critical to the prudent management of their retirement portfolios. Unfortunately, some of these recommendations, if followed without an understanding of their limitations, can lead to mediocre returns that will signficantly reduce the long term value of your portfolio. The more common of these recommendations include: 1) diversify your investments; 2) rebalance your holdings; and 3) focus on capital gains.
Diversify Your Investments
Some diversification of your holdings is important, because if you only hold a position in a single company and it cuts its dividend or becomes insolvent, you could lose a significant portion of your investment capital. There for anyonw who has little or no interest in managing there retirement portfolio, I recommend that they retain a qualified financial advisor to manage their investments or buy a broadly diversifed mutual fund or exchange traded fund.
However, if you willing to take the time to learn how to select outstanding companies and regularly monitor their financial performance, you can achieve a much greater stream if dividend income, as compared to the majority of broadly diversified managed funds, including dividend funds. This is because most managed funds include a large number of companies that pay no or minimial dividends, so that average annual dividend income return from such funds is less than 2%.
Rebalance Your Portfolio Holdings
Most financial advisors will recommend that you rebalance your portfolio holdings once each year, which certainly sounds like a good idea. After all, who doesn't want balance in their lives? Rebalancing your portfolio means that if you have an investment that is growing much faster than your other investments, you should sell some portion of the faster growing investment and use the proceeds to buy more of your slower growing investments, in an attempt to have each holding in your portfolio grow at about the same rate. Rebalancing in this way defies common sense. As Warren Buffett explains, such a strategy is like trading Michael Jordan to another team because he is scoring more baskets than the other players on the team !
If you see one of your companies or investments that, for whatever reason, is growing faster than most of your other holdings, you should consider buying additional shares of the faster growing company, provided its financial future continues to look secure. Conversely, if one the companies in your portfolio is growing much slower that the others, and its future prospects are unlikely to improve, you should consider replacing that company with one that has better financial prospects.
Focus on Capital Gains, not Dividends
The financial industry and media focus most of their attention on share prices and daily fluctuations in the stock markets, probably because these gyrations are exciting and therefore more newsworthy. And in theory, if you could take advantage of these price fluctuations, you would make a lot of money in a short period of time. Research has found that it is impossible for anyone to consistently predict the changes or direction of market prices, so that trading stocks, in at attempt to realize capital gains, is not much different than gambling. In fact, research has also found that anywhere from 80% to 90% of active stock traders lose money, and the more frequently they trade, the more they lose.
Take Ben Graham's sage advice. Ignor stock market gyrations, unless a drop in the price of one of your favourite companies presents an opportunity for you to buy more shares of one of your favourites, at a discount to its fair financial value. Focus your attention on the dividends and growth prospects of the small number of financially stable companies that you own or would like to own. Everything else is just a distraction.
1. Daniel, W., 2023. Charlie Munger says most money managers are little more then "fortune tellers or astrologers. https://finance.yahoo.com. Article dated May 1, 2023.