At Dri Financial Group, we emphasize the value of a diversified, long-term and evidence-based investment strategy. We do not follow fads, fashions, or media sensation.
I have recently watched, with deep concern, a handful of stocks(GameStop, AMC, Blackberry) appreciating despite no meaningful change to their fundamentals. Usually, a stock spikes after making a major positive announcement.
For example, many of our clients own TFI International Inc. (a national trucking company) at a cost base of approximately $40. Recently, the company announced the purchase of UPS’s trucking business at a cost of approximately $800M.
Yes, the price was astronomical. But the acquisition doubled the size of the company and ensured the continuation of UPS‘s business. TFI stock jumped by more than 30% and, as of early February, trades at approximately $90.
That’s how stock spikes should work: positive announcements lead to stock appreciation. Lately, however, some stocks have not behaved in this fashion.
Instead, investors “bet” on GameStop by assuming they could quickly buy and resell the stock to someone else at a higher price. This is called the “greater fool theory,” because it assumes a buyer willing to pay a higher price always exists.
We know from experience this is not a profitable strategy and is doomed to separate investors from their money. Yet we have received emails, texts and phone calls from clients asking why we didn’t buy GameStop before it spiked, or if they should become more aggressive with their investment strategy. Some have even considered moving their funds to the stocks with all the action.
You know my response to these inquiries: “Stick to your investment strategy and don’t speculate.”
In March 2020, I had numerous discussions with clients explaining that the best course of action during the stock market lows is to stay invested and not give into fear.
Now, about 12 months later, I’m recommending that clients stick to their asset allocation and not give into greed…A very interesting turn of events.
The human emotions of fear and greed will always drive the market in the short run. But over the long term, a laser-focused financial plan customized to your personal circumstances is still the best way to achieve your wealth goals.
As many of you know, I don’t make predictions about the stock market or individual stocks, but I am very confident in saying that our investment principles will help you reach your financial planning goals.
Let’s review the basic investing principles you should think about when you’re getting emotionally pulled to make a change to your portfolio.
1. Goals
“If you fail to plan, you plan to fail.” This is never truer than when applied to financial planning.
For those looking to achieve financial independence, I usually start with this question: What does financial independence look like for you?
Surprisingly, many people are not clear and aren’t sure if or when they will ever achieve it. Here is my definition of financial independence, in case it motivates you to establish your own.
For me, financial independence occurs when my investment portfolio generates enough passive income to cover all my lifestyle expenses. I have achieved this goal by saving between 15-20% of my earnings for approximately 25 years. Financial freedom allows me the time to work on becoming a better father, friend, brother, and son.
As a chartered Financial Planner, I suggest you have customized plans/goals for the following:
a) Retirement
b) Estate
c) Education
d) Tax minimization
e) Investment
f) Risk minimization
g) Any other personal goals (e.g., buying a cottage or paying for children’s weddings)
2. Balance
In my recent blog about risk tolerance, I encouraged you to identify your personal risk tolerance and to establish an asset allocation based on this assessment.
Investors remain invested during market corrections if their asset allocation is appropriate for their risk profile, thus increasing their chance of achieving their financial planning goals.
If the asset allocation is not aligned with the investor’s risk tolerance, they may try timing the market, which can lead to big losses. Once the asset allocation is selected, we suggest investors implement an active micro and macro rebalancing approach. This is because asset allocation drifts over time as one asset class outperforms the others.
For example, if the desired asset allocation is 60% equities and 40% fixed income, a strong equity market may skew it to, say, 70% equities and 30% fixed income. When this happens, we suggest selling 10% of the equity position and transferring the funds into the fixed income side, thus implementing a buy low and sell high investment strategy.
As well, over time some individual stocks will outperform others and become a bigger portion of the portfolio. When this happens, we suggest trimming down the overweighted position and transferring the funds to the stocks that are underweighted, again implementing a buy low, sell high strategy.
3. Rules based investment strategies
The Dri Financial Group team bases our investment strategies on research, not on emotion or media headlines.
With the assistance of CPMS, we review hundreds of fundamental factors (such as dividend yield, quarterly earnings surprises, nine month price change, etc.) for thousands of
Canadian and US companies.
The research helps us identify the common factors found in all top-performing stocks.
For example, if the research showed that top-performing stocks of the last 30 years have annual dividend increases and a P/E ratio at or below the market’s P/E ratio, then we run a screen for all current stocks with those two factors.
This approach is called a “rules based” strategy, because we set the rules for all the buys, and the rules sell before anything is bought. Notice how this strategy is not swayed by the noise of the market or the media or our brother-in-law.
Many have asked, “Richard, how can you be so confident that the strategy will work?” My answer is always the same. “I have back tested the strategy, it worked well against its benchmarks, and I see no reason for it not to work in the future.”
Will the models occasionally underperform its benchmarks? Absolutely! But over the last 35 years of back testing, it has outperformed its benchmarks, and I expect this to continue.
4. Discipline
During the last 12 months, investors have been challenged with a significant market decline followed by a remarkable recovery.
Even the most seasoned investors have been shocked by the speed of events and have questioned their plans and objectives.
When you have created goals/plans based on your personal situation, selected a balanced asset allocation reflecting your risk profile, and used a rules based investment strategy to select individual stocks, have confidence in your work and the discipline not to abandon the plan when market events challenge your thinking, train your mind to place current events in perspective and maintain long-term discipline.
Don’t find yourself struggling to tune out the noise, tempted to chase yesterday’s winners, or being swayed by the loudest media voice…
If you have any questions, please, give me a call! Let’s work through my four investment principles together and put speculating aside.
Never Retire Profile
What’s not to like about Dolly Parton? Whether your taste in music or entertainment overlaps with Parton’s creative output over the 50+ years of her career or not, there’s no doubt she has made a significant impact in many areas over her lifetime. Born 75 years ago and raised in a one-room cabin in Tennessee along with her 11 siblings, Parton began singing on local radio as a child and moved to Nashville the day after she graduated from high school. In addition to her decades-long career in music and film, Parton owns several businesses in Tennessee and is known for her philanthropy. For example, her literacy program mails one book per month to every enrolled child (currently about 850,000) from birth through to entering Kindergarten. And, in addition to supporting many healthcare initiatives, she most recently donated $1M toward COVID-19 vaccine research at Vanderbilt University, partially funding the new Moderna vaccine.
The process of finding a wealth advisor can be overwhelming. It is our job to make that process simpler and easier. Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind. It’s structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.
We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.
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