Larry Berman's take on the different investment personalities
The final investor type that we are going to explore in my Fall 2017 Investor’s Guide to Thriving is the independent analyst.
Independents are actively involved in the investment process and enjoy the research part of investing. They are good decision-makers and have no problem pulling the trigger. They are above average risk takers, but not as much as the growth “accumulator” investor type. They may have unconventional views and are sometimes contrarian thinkers. This tends to make it more difficult to follow longer-term investment plans. Many investment decisions are logical, but many use gut instincts, which tend to lead to more inconsistent results.
There are several cognitive biases that impact independents. Independents tend to act too quickly without learning as much about their investment choices as they should. They mistake reading an article in a newspaper as research (or watching BNN) for original research. They tend to like confirmation of their investment ideas and have a portion of their portfolio with an advisor, but have a significant portion in a self-directed account.
When their investments fall, they do not like to admit they were wrong. Self-attribution bias is a condition that often leads to concentrated portfolios. They add to positions that are working. That’s not bad, but it does lead to over concentration and higher risks. When positions do not work out, they often blame the poor advice of others. Confirmation bias in cognitive minded independents, tends to lead them to stand by decisions they have made and they will tend to hold losing positions. They tend to only consider information that confirms their view rather than information that may suggest their view is not correct. The biggest risk for Independents are concentrated portfolios.
In a global context, Independents should be more aware of concentrated portfolio risks. In Canada, were have a very poorly diversified index. The S&P/TSX Composite Index has many concentrated sectors. When they work, they can really add to returns. When they do not work, they can really hurt.
When we look at concentrated Canadian portfolios, we fall far behind the world in many key long-term growth sectors like technology and health care. We have too many sectors that may have seen secular peaks in mining and energy. This suggests that Canada may underperform the world looking out over the next few decades, unless financials (and banks specifically) lead the world markets.
SECTOR SHARE: CANADA VS. THE WORLD
|Information Technology||16.33 %||3.26 %|
|Health Care||10.9 %||0.61 %|
|Consumer Discretionary||11.89 %||5.42 %|
|Materials||5.63 %||11.44 %|
|Energy||6.09 %||20.31 %|
|Financials||18.24 %||34.3 %|
The most diversified you can be is by equally weighting all sectors or by using ETFs that focus on maximum diversification. One example of equal weight indices over the weighted indices we can see is the S&P 500 over the past 10 years. Since Oct. 2, 2007, the equal weight index returned almost one per cent more annually versus the traditional size (capitalization) weighted index.
If you are an independent, our upcoming Berman’s Call tour will help you learn how to curb some of the investment biases (self-attribution, confirmation) that may be hurting your investment returns and properly diversify your portfolios. The key here is to learn about correlation and diversification and its impact of return and risk in your portfolio.
You will learn how to identify what type of investor you are and some techniques to improve how to manage your asset allocation so you can preserve and grow your portfolio. The events are free and we ask for a voluntary charitable donation to either Sick Kids Hospital or Baycrest Brain Health research for Alzheimer’s. Visit www.etfcm.com or Bermanscall.com to register.
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|Oshawa, Ont.||Wed. Oct. 18|
|Hamilton, Ont.||Thu. Oct. 19|
|Markham, Ont.||Sun. Oct. 22|
|Edmonton, Alta.||Thu. Oct. 26|
|Calgary, Alta.||Sun. Oct. 29|
|Montreal, Que.||Thu. Nov. 9|
|Ottawa, Ont.||Sun. Nov. 12|
|Victoria, B.C.||Thu. Nov. 23|
|Vancouver, B.C.||Sat. Nov. 25|
|North York, Ont.||Sat. Dec. 2|