A five-point manifesto for a new decade of investing:
1.) All new products from the investing industry should be avoided.
2.) Only proven funds and fund managers are worth dealing with.
3.) Owning individual stocks is only for those who really know what they're doing.
4.) Moderate returns are better than gyrating between big wins and losses.
5.) Always ask yourself: what would happen to my portfolio if we had another downturn like 2008-09?
The common theme here is investing simplicity and it's a reply to the too smart, too cute, too sneaky decade just passed. The main lesson: What you don't understand can maim your portfolio, and probably has already. Remember the pain and channel it into a smarter, simpler approach for the new decade ahead.
Start by rejecting the new products of an investment industry with a proven record of putting sales and profits ahead of what's right for clients. A quick example: Lifecycle funds, which were supposed to provide a self-adjusting, no-worry mix of investments for your entire investing lifecycle. In the financial crisis, lifecycle funds proved all too mortal and some have been shut down early. In 2010, expect to see new products tailored to the conservative investors who have billions of dollars safely and unproductively stored in money market funds, savings accounts and short-term guaranteed investment certificates. Reject anything that seems to offer suspiciously high yields. Wherever there's higher-than-normal returns, there's outsized risk as well. Don't allow yourself to be convinced otherwise.
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Not all new products are suspect, but why take the chance? There are so many proven money managers, mutual funds and exchange-traded funds that you simply don't need to branch out. New sectors? We have enough already. New managers? Let them learn on someone else's dime. New fund companies? Utterly superfluous. In the decade ahead, track records are everything. Never buy without consulting them.
Now, for your stock-picking aspirations. If you're thinking of choosing individual stocks instead of using exchange-traded funds (ETFs) or mutual funds, be honest with yourself. Do you have the chops, or not? Let's remember that bank stocks lost about half their value at the worst of the bear market, that many blue-chip dividend stocks have been slow to recover since the March, 2009 market bottom and that a few big names like Manulife Financial and General Electric cut their dividends. You could work around all of this with judicious stock picking and diversification, but only if you know what you're doing. Do you?
The decade just passed was defined from the investor's point of view by its stunning ups and downs. There were huge returns at some points, and monster losses at others. Unless you enjoy investing roller coasters, think about trying to level out the ride in the decade ahead by owning investments that pay income and thus provide you with returns in all market conditions. Bonds and GICs qualify here, as do dividend-paying common shares and preferred shares. A mix of these types of investments might, in theory, provide you with a combined yield of 3 to 4 per cent. That's significant when you consider that the long-term average annual return from stocks is thought to be in the 7- to 8-per-cent range.
Our final point is all about harnessing the negatives of the 2008-09 bear market in your investing. A good, quick way to do a risk assessment on something you're considering for your portfolio: see how it held up in the bear market, and then check on its long-term results. Stocks and fund managers that make money and limit risk are exactly the right investments for the decade ahead.
Rob Carrick