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How to maximise your success as an individual investor

Andrew Willis  |  28 Jun 2019Text size  Decrease  Increase  |  
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Just because you're a self-directed investor doesn't mean you need to take an inferior approach, with plenty of new technologies, investor information and other tools now at your disposal.

But where do you start? How do you fill in the gaps that new investing apps can’t (yet)? And how should you temper your confidence to avoid pitfalls that trip-up even the pros?

Know yourself first

It’s easy to open a brokerage account and start trading, but it’s important not to be swept up in the excitement of your independent journey without knowing where you’re headed and how you plan to get there.

First, says David McGann, director of strategy at fund manager BMO, you need to look into a mirror and ask yourself: What kind of investor am I?

Some key questions you need to answer include:

  • What do I want to achieve?
  • How will the various parts of my portfolio work together to help achieve my objectives?
  • What is my risk tolerance?
  • What is my timeline?

These kinds of questions will help guide your first few big decisions, such as your asset allocation.

“Every investor should have a plan,” says Michael Keaveney, head of investment management for Morningstar Associates Inc. “You don’t want to be passive with your goals.”

Remember that it’s not just about choosing investments, says Keaveney, “that would be like focusing on what car you want for the trip without knowing your destination.” Objectives are all-encompassing, he says – even the pros establish them within your funds.

What’s your advantage?

Every investor should have their own 'edge'.

"If you’re going to take an active approach based on your own investment decisions, they should be different than the market," says Keaveney, highlighting three categories of superiority you might find yourself in, and worth focusing on.

Market advantage: This is when you have an information advantage, meaning you know something others don’t. “This is rare”, says Keaveney, noting that inside information is regulated in such a way that it should stay inside.

Analytical advantage: You’re increasingly less likely to have data others don’t, but investors now have more tools to help them better slice and dice data in their own advantageous way.

“If you can put information together better than the market, you have an analytical advantage,” says Keaveney, noting that the market can be tough to beat in this regard – there are competitors out there investing millions into new ways of looking at data.

Behavioural advantage: This won’t require millions of dollars or secret sources of information. This one is about what is within. The market isn’t always rational, and investor psychology can be flawed.

“A person who is super disciplined and sticks to their goals will have this advantage,” says Keaveney.

Build a plan that lasts: It’s one thing to build a plan, but another to stick to it. A big part of the challenge of being able to stay on course is attempting to estimate a realistic trajectory in the first place.

Are you going to hit the exact percentiles you set? Nope. Is the market going to be volatile? Yep. Are you going to encounter ‘FOMO’ (fear of missing out) moments? Very likely.

If you’re really going to go for it alone, you’ll need to establish a mindset that accepts the unexpected and doesn’t respond impulsively. “It’s tough to be your own coach,” says Keaveney.

There are, however, rules you can establish to remind you that the market can move in mysterious ways and provide you cues for the right times to buy and sell based on your goals. “Plan your ins-and-outs,” says McGann.

“You need to build in buffers,” says Keaveney, noting how market volatility alone can account for a range of up to 10 per cent in ups-and-downs depending the timeframe. A plan that includes a tolerance for swings can help reduce impulsive selling.

You should plan to reduce impulsive buying as well. “You’ll want to avert the fear of missing out,” Keaveney adds. You can build in buffers for this as well. “Perhaps you have a steady job and there’s a percentage you can allocate for speculative investments.”

When you’re ready to start allocations, go back to your risk tolerance and time horizon. Consider the types of assets you want to hold, and the degree of control you’d like over them.

Remember that funds have their own objectives which need to align with their role in your portfolio.

Consider management fees and the benefits of an ETF portfolio.

And, especially if you’re buying stocks, understand the importance of diversification and its relationship to portfolio risk.

Before your click the ‘buy’ button, ensure you’ve done your due diligence. Morningstar’s Fund Finder and ETF Finder are useful tools.

Pitfalls even pros fall for

A good plan will help you mitigate these risks, but there are some pitfalls that can still challenge the most thoughtful plans and require some good old discipline.

Emotions: “We’re not always rational,” says McGann. And we’re bombarded by information every day that drives us to act.

“We can be the victims of our own tools,” adds Keaveney, noting that in the age of daily updates and information, it’s becoming harder for investors to focus on their long-term goals and they risk using information to confirm their pre-existing biases, “ask yourself, why are people selling? It’s a good idea to understand the counterargument."

Hot tips and crowds: Think about the intent of the people giving you stock tips. In the case of cannabis stocks, the most successful investors were in early, says McGann. By the time something becomes a hot tip, it might not be so hot anymore.

“Early adopters could be selling,” adds McGann, and the crowd around them might be a cue to pass.

Risk collection and over-concentration: “It’s hard to know exactly how much risk you’re holding,” says McGann, as company development and economic conditions change outlooks every day.

You’ve got to keep your ear to the ground. Also make sure you’re not over-concentrating your portfolio. “Sectors move as a group,” adds McGann, cautioning that one development could lead to overly significant portfolio effects.

Not changing your plan: Preparing is very important, but so is progress.

“Revisit your goals on a regular basis,” says Keaveney, “life happens, goals change.”

Changes outside on the investment world can change your risk tolerance and goals – marriages, family and job changes, and retirement are some events that should have you taking another look in the mirror and re-tuning your portfolio’s positioning and objectives.

is Content Editor for Morningstar Canada

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