I haven’t written much lately about behavioural finance – the way in which human psychology makes successful investing more difficult – but a terrific sentence summing up the importance of the topic in a blog post by U.K.-based fund manager and author Joe Wiggins provided a good excuse to revisit the theme. Mr. Wiggins wrote: “The central issue that behavioural finance faces is that – at its core – it is asking investors to stop doing things they inherently and instinctively want to do.”
Mr. Wiggins began with the example of an investor selling a fund with poor recent returns. This might feel satisfying in the moment but extremes in negative sentiment often represent a bottom in investments, and that person selling might be locking in a loss when a recovery is imminent.
The human tendency to feed our egos can also get in the way of portfolio returns. The belief that we are smarter than others leads to strategies with proven low probabilities of success, like market timing. Ego can also lead to getting emotionally attached to an investment idea and refusing to admit it hasn’t worked.
Mr. Wiggins makes the important point that the finance industry encourages our worst tendencies. Finance theory shows that the more transactions an investor makes, the more likely underperformance becomes. Yet financial professionals often encourage transactions because they generate fees. He writes: “Lots of value accrues to turnover, stories, short termism and irrelevant comparisons. When I say value, I mean fees – not performance.”
The author offers five rules of thumb to avoid psychological hurdles to investing.
The first is to avoid behaviours that provide immediate satisfaction. The second is to accept that we are not smarter than the market.
The third tip is to avoid looking at what other investors are doing; the fourth is to accept that markets are extraordinarily complex and, in the end, unpredictable over shorter time frames. The fifth and final rule is to ignore most of what has grabbed your attention in any given day when making investment decisions. This is similar to venture capitalist Morgan Housel’s advice to avoid all news that is unlikely to be relevant three months in the future.
Mr. Wiggins’ column is a useful reminder that our brains did not evolve to invest in markets and in many many ways human psychology is actively working against portfolio returns. When making portfolio decisions, investors must always question whether they are doing what feels right, or what is right based on market history.
— Scott Barlow, Globe and Mail market strategist
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The Rundown
If pension funds can’t see the case for investing in Canada, why should you?
Ian McGugan says it’s time to ask a rude question: Is Canada still worth investing in? After all, if the Canada Pension Plan Investment Board and other sophisticated investors aren’t overwhelmed by Canada’s investment appeal, why should you and I be?
‘Overdue’ pullback in U.S. stocks to test dip-buyers’ resolve
Reuters reports that the first sharp pullback for U.S. stocks in half a year is leaving investors wondering whether to buy the dip or hold out for more declines.
Why BCE, Rogers and Telus are all struggling – and their misery is likely to last
A new consensus is quietly forming around Canada’s telecommunications industry – a painful narrative that is putting more pressure on the sector’s sinking share prices. After years of easy wins, cable and wireless companies are trapped in a new era of tepid growth, and there are no easy fixes in sight, writes Tim Kiladze.
I think my adviser may soon retire – what should I do?
Most of a relationship with a financial adviser will rightly focus on your retirement. But your adviser’s retirement plans matter, too. Rob Carrick has some advice on how to handle this sensitive topic.
These four ETFs are posting strong gains in a mixed year for stocks
Tom Bradley, a member of the Canadian investment industry’s Hall of Fame, drills into how valuation works and why it’s important.
Looking for value stocks? Some lessons from the masters
Norman Rothery summarizes some of the more interesting insights gleaned from the University of Western Ontario’s recent Value Investing Conference.
Bitcoin traders shrug off ‘halving’ to focus on broader market risks
Bitcoin’s so-called halving event has had little impact on its price so far, with industry insiders on Monday saying the cryptocurrency’s fortunes were more closely tied to broader financial market sentiment and geopolitics.
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Ask Globe Investor
Question: What is your opinion of investing in Canadian depositary receipts (CDRs) for U.S. companies such as Amazon.com, Nvidia Corp. and Microsoft Corp., as opposed to investing in the U.S. stocks directly?
Answer: Like most investing products, CDRs have their pros and cons.
The big advantage of CDRs is that you can buy them in Canadian dollars, which spares you from paying the steep foreign exchange costs that brokers charge for converting your loonies into greenbacks. CDRs are also currency-hedged, which means the value of your investment should be insulated, at least to an extent, from fluctuations in the Canada-U.S. exchange rate.
Another benefit of CDRs is that, because they trade at much lower prices than their respective U.S. stocks, it’s easier to invest relatively small sums of money. As an example, say you have $2,000 to invest in Nvidia, whose shares were trading early Friday afternoon at about US$814 on the Nasdaq Stock Market. After taking the exchange rate into account, your $2,000 would buy a maximum one Nvidia share, leaving you with $850 in uninvested Canadian cash.
With Nvidia CDRs, on the other hand, you could put virtually all of your money to work. That same $2,000 would buy 26 Nvidia CDRs based on Friday’s trading price of about $76.50 on the NEO Exchange, leaving you with just a few dollars of idle cash (depending on the size of the commission).
But there are also some significant cons. Click here to read my full column on the topic.
Tom Czitron, who managed funds for many years, says it’s time for Canadians to lose their home-country bias. He’ll recommend some ETFs for international stock and bond exposure.
Have your TFSA investments topped half a million? Share your story with The Globe
The Globe and Mail is looking to hear from Canadians who have large TFSA balances to find out more about how they accomplished the feat. Click here to find out more about how to participate.
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
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.
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.
