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5 golden rules of investing put under the microscope – Financial Post

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Peter Hodson: These basic investment rules should apply to almost everyone

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There is always someone in the investment world, some expert, TV personality, stock analyst, fund manager or, um, media columnist, telling you what you should do. Most of these commentators are smart and spend most of their working day looking at all things investment-related.

But you are different from other investors. What works for them may not work for you. There is a reason why regulators are very strict on the “know your client” rule (KYC). Investment managers cannot just simply assume their advice is good for someone in particular.

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That said, there are some basic investment rules that we do think should apply to almost everyone. The internet calls these the Five Golden Rules of Investing. Let’s take a look at them, and provide some commentary.

If you can’t afford to invest yet, don’t

This rule kind of seems obvious, but you might be surprised at how many people ignore it. We have seen people borrow money to invest on margin even while they have huge credit-card balances. We have watched people buy penny stocks even as they struggle to come up with rent money.

We think, instead, you should look at paying down debt as an investment in itself. Suppose you have a $5,000 balance on a credit card at 19.99-per-cent interest. Paying down that balance guarantees you a solid investment return through lower interest payments. Saving 20 per cent in charges is just as good as making 20 per cent as far as your net worth is concerned (even better if one looks at the after-tax impact).

Of course, there is nothing in the investment world these days (or ever, probably) that is going to guarantee you a 20-per-cent payback. So, you need to get your financial house in order before you consider investing.

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Have the correct investment expectations

Risks widely vary across investment markets and products. Be wary of implied rates of return that sound too good to be true, because they probably are, at best, very high risk or, at worst, complete scams. Many investors get attracted to high yields: some derivative products have current yields of 15 per cent or more. But past and current returns are not the same as future returns.

A realistic long-term return for stock investors might be in the eight-per-cent range. For a bond investor, five per cent or so. Don’t chase returns. Don’t envy someone bragging about 20-per-cent returns — they are not you, and they might be taking on huge risks.

But if things do work out for you as an investor, don’t get greedy. If one of your stocks has soared, that’s great, but it likely now represents a big portion of your net worth. As such, any future disappointment in that stock is going to be far more painful. In addition to maintaining realistic expectations, we would also maintain portfolio balance and discipline — always.

Understand your investments

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Warren Buffett said it best: “I never invest in something I do not understand.” Seriously, how many current cryptocurrency investors do you think actually know what they are doing? We always get customer questions on market-linked guaranteed investment certificates or principal-at-risk notes. Even with 40 years’ investment experience, we can barely get through all the documentation and risk disclosures that come with these products.

There are now leveraged single-stock exchange-traded funds (ETFs). There are leveraged ETFs where you are promised two or three times the return of some specified investment or index. You can buy ETFs that go up when the market goes down, or ones that go up if volatility increases.

We like to keep things simple. If you can’t explain an investment to your 10-year-old, you are probably taking on too much risk.

Diversification

A concentrated portfolio is one way to build high wealth, but it is also a way to surely go broke if things don’t work out as expected.

Many dividend investors learned a hard lesson last year when nearly every dividend stock declined at the same time as interest rates soared. Technology investors are used to getting crushed every so often as tech stocks tend to be highly correlated. Investors who loaded up on real estate when interest rates were near zero are now getting a very painful lesson in how lack of diversification can hurt.

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It is commonly known that diversification reduces risks, but investors still forget. We’ve seen investors with six bank stocks who think that’s diversification (hint, it’s not.)

Take a long-term view

In the short term, the market is a voting machine. In the long term, it is a weighing machine. Short-term stock prices are influenced by a multitude of factors: interest rates, inflation, sentiment, politics, analyst upgrades and so on. But in the longer term, it is how a company specifically performs that will determine its true value. Nothing else really matters if one is looking at an investment period of 10 years or more (and you should).

Academic studies have proven that over one day or week, the odds of having a positive investment return are worse than 50/50. Over a one-year period, this rises to 73 per cent. Over three years, 84 per cent. Over five years, 88 per cent. Over 10 years, 94 per cent. Over 20 years, it’s pretty close to 100 per cent.


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As they say, it’s not timing the market, it’s time in the market. But most investors do themselves a disservice by not sticking it out long enough. We get customers saying, “I’ve owned this stock for three months and it is not performing. What should I do?” Sometimes, stocks take a while to perform. Patience is certainly required at times in the market.

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX composite little changed in late-morning trading, U.S. stock markets down

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TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.

The S&P/TSX composite index was up 0.05 of a point at 24,224.95.

In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.

The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.

The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.

The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.

This report by The Canadian Press was first published Oct. 10, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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