Wealth Insights - March 2017

Wealth Insights

March 2017

Sidestep these biases to improve investment returns

We all have biases – inclinations, preferences and preconceived ideas that sometimes steer us in the wrong direction. Some biases affect investment decisions and can have a negative impact on investment returns. However, being aware of your biases can help you avoid them.

Here are some we regularly see among our clients, along with approaches we can use to build an asset allocation that feels comfortable.

Home bias

Familiarity keeps many investors’ portfolios concentrated in Canada. This restricts opportunities, diversification and growth potential. While it’s true that Canada has many strong businesses, they represent a small fraction of what’s available globally. Furthermore, a large proportion of our most successful companies are concentrated in just three sectors: energy, materials and financial services.

There is a whole world of investment opportunities that many Canadians never explore – and there are ways to benefit from greater geographic diversification while respecting your comfort zone. For example, we can seek out Canadian companies that operate internationally and that are, therefore, exposed to other countries’ economic growth. We can also look just south of the border to the U.S. market, which shares many of the Canadian market’s characteristics but provides access to a broader range of companies.

Loss aversion

Let’s say someone offers you two choices. You can take a crisp $100. Or you can gain $200 and then lose $100. The net result is the same: you’re $100 richer. But most people would choose the first option because losing money hurts. This bias makes some investors shy away from growth opportunities to avoid losses. Others refuse to get rid of underperforming investments because they’re in a loss position, even though there may be better opportunities elsewhere.

The key here is to set and maintain an appropriate asset allocation. Your portfolio mix is designed based on a “macro” view of your personal situation – one that balances your desire for growth with your need for security. By following your asset allocation, we can ensure you aren’t positioned too conservatively or too aggressively. And regular rebalancing based on analytical analysis, rather than fear of losses, can help you make wise buy and sell decisions.

Follow the leader

Simon says … buy today’s hot stock! There’s a comfort, maybe even a euphoria, that comes from following the herd. After all, everyone else can’t be wrong. Or can they?

Often, by the time a rising investment makes the news, it’s gone beyond hot and become overheated. As a result, a lot of investors may pay more than what the stock is actually worth based on fundamental values.

We prefer to follow a disciplined approach to investing that incorporates multiple checks against the temptation to follow the herd. For example, regular rebalancing is designed to take some profits off the table and ensure that your portfolio doesn’t skew towards the latest short-term fad.

So, the next time a potential investment makes your body tense up – whether from anxiety or excitement – be aware that a bias may be at work. Recognize it for what it is, and then talk to us. Together, we can protect your portfolio from bias-driven decision-making.

Get the right advice

Dealing with the uncertainty of financial markets can be difficult when you try to invest alone. That's why it pays to team up with a partner who has the knowledge and expertise to put you in charge. Your Credential® advisor will work with you and help you make important planning decisions that extend well beyond where and how you invest. They do more than just manage your investment portfolio; they invest the time, knowledge and emotional discipline to ensure you have a strong financial plan for the future.

At Westminster Savings, we'll help you create an investment strategy that evolves as your life does, and keeps the focus on your goals – not on the things you can't control. Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.

The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. Mutual funds, financial planning and other securities are offered through Credential Securities Inc. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.


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