Understand the factors that affect investment decisions so you maximize your portfolio returns
It’s generally a waste of time to obsess about the possibility of a short-term downward movement in the economy, stock market or both. These downward movements can occur for a wide variety of reasons, at any time—even outside the kind of significant downturn caused by COVID-19 or, more recently, the Russian invasion of Ukraine. Still, for every “real” short-term downturn, you can spot a dozen fake-outs—situations where the market or economy looked like it was going into a tailspin, but pulled out of the drop and began rising at the last minute.
On the other hand, it does pay to obsess about factors that affect investment decisions like portfolio diversification, investment quality, and the extent to which your portfolio suits your personal goals and temperament.
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Portfolio diversification is a key factor affecting investment decisions:
Your portfolio strategy should begin with a fundamental piece of advice that we underline frequently: Spread your money out across most if not all of the five main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Finance and Utilities sectors generally involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.
As well, balance aggressive and conservative investments in your portfolio, in line with your investment objectives, and the market outlook. Above all, avoid the urge to become more aggressive as prices rise and more conservative as prices fall.
The best blue chip stocks offer strong investment quality. When the market suffers a significant downturn like that prompted by the emergence of the coronavirus pandemic, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.
In keeping with the Successful Investor philosophy, we feel stocks that have been paying dividends for five years or more are some of the safest investments you can have. Dividends are a sign of quality and a company’s financial health. Canadian banks and utilities are among the income-paying stocks that we consider to be safer investments.
Personal needs and temperament affect investment decisions:
If there is one piece of personal wealth management advice you should immediately implement, it’s to have a disciplined plan for saving during your working years. This, above all things, can set you up for optimal investment gains. We talk more about this in 9 Secrets of Successful Wealth Management, which is free for you to download.
Many of our wealth management clients live off their investments. From time to time, they need to sell some of their holdings to supplement their dividend income. But rather than trying to predict price changes or spot highs and lows, we ensure that decisions affecting the client’s portfolio are tailored to his or her circumstances and temperament.
Factors that affect investment decisions: Hidden assets
Hidden assets are also worth a closer look. As long-time readers know, we’ve had a great deal of success over the years in investments that come with hidden assets. These are assets that are worth substantially more than the value they carry on the company’s balance sheet, if they appear there at all. Buying stocks with hidden assets is a little like getting something for nothing, at least for patient investors.
Companies with hidden assets can gain like any stock when the market rises. But they also tend to hold on to their value in a market setback. In addition, they tend to bounce back nicely when conditions improve.
Of course investors worry, especially about the kind of economic upheaval caused by COVID-19; it’s not in human nature to avoid worrying altogether. As humans, we are bred to overreact, to dwell on or even brood over any hint of risk.
There are always investment-related worries to occupy our minds. Sometimes for investors, this means worrying about high-risk investments that they’ve made.
You get a much better return on time spent if you devote less of it to worrying about (and in fact avoiding) high-risk investments, and more of it on developing an investment strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments (and cutting risk), and the structure and balance of your portfolio.
For additional guidance, subscribe to Canadian Wealth Advisor. In Canadian Wealth Advisor, we always focus on protecting your “safe money”—the part of your portfolio you’re counting on for the future—without sacrificing the potential for strong returns.
A lot goes into making investment decisions. What factor has played the biggest role in forming your past decisions?
This article was first published in 2017 and is regularly updated.
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