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Keys to equity investing.
At times when global political uncertainties and market volatility provide the perfect breeding conditions for fear and anxiety, I can’t help but reflect on some of the most basic truths that have proven themselves over and over throughout my 30-year tenure advising clients on wealth management best practices.
The following key principles have stood the test of time and helped prudent investors build wealth and financial confidence through market ups and downs.
Pick a sound investment process
It is important to have an overarching strategy for your portfolio that allows you to focus on picking quality investments to help you achieve your goals, rather than the day-to-day performance of individual investments. A highly disciplined process with rational criteria for buying or selling can allow you to do this, while taking the guesswork and emotion out of investing.
A sound investment process will focus on picking the leading companies in essential industries. Essential industries tend to have more consistent demand for their products or service, which means companies that will feel less of an impact during economic downturns.
Invest in quality
Make no exception on this rule. Always buy quality. While stocks will inevitably go through peaks and troughs, a quality stock will not rise and fall so drastically causing you to lose ground on your financial plan.
Here are a few indicators of quality to look for:
l financial security and stability;
l regular dividends;
l attractive business prospects; and
l quality management.
While these are good guidelines to use in selecting a quality company to invest in, the quality of a company can change for a number of reasons based on economic or market conditions. As part of your annual or quarterly reviews, set aside time to review your portfolio’s holdings and have a process in place to cull companies that no longer meet pre-determined quality criteria.
Put the power of dividends to work
As mentioned, regular dividend payments can be an indicator of a quality company with solid earnings. As a general rule of thumb, look for companies that boast regular dividend payments across 10 consecutive years.
The only thing better than receiving regular dividends, is reinvesting them. Over time, reinvesting your dividends can magnify your returns by several times. While you may need the income from your stocks for current spending, imagine the potential growth over the long term if you could save and reinvest even a portion of your dividends. For many stocks, automatic “dividend reinvestment plans” are available.
Long considered the “golden rule” of investing, diversification remains the best way you can reduce investment risk. Diversification in simple terms involves investing in a number of different investments – across different asset classes, industry sectors, geographic areas, investment styles, etc. This way, you can minimize the impact of poor performance, both from a single investment and groups of investments with similar characteristics.
Set the right asset allocation
Your asset allocation is primarily responsible for establishing the balance between reducing risk and enhancing return potential. Your target asset allocation between equities, fixed-income and cash, is based on factors such as your age, and need for income, growth and security. From time to time, your asset allocation should be adjusted to reflect current market conditions and any changes in your individual situation or goals.
Choose companies that are prepared for growth and opportunity
While it is important to include dividend-paying stocks in your portfolio, you should also look to include a few low yield, high-earning stocks. These are companies that conservatively build up reserves to be prepared for emergencies or to take advantage of opportunities as they arise. Companies with greater reserves are better positioned to weather economic downturns or take advantage of opportunities as they arise.
Build your investment knowledge
If you understand your options and make an educated decision, you’re more likely to be confident in that decision and stick with it in the long run. Building your investment knowledge doesn’t have to mean formal classes, it can be as simple as discussing your options with your advisor, attending education seminars in the community or subscribing to a quality financial publication.
It's not about timing the markets, but time in the markets
Once you have established your investment plan, it’s important to stick with it, especially during periods of market volatility when it can be most difficult to do so. Remember that your plan should be designed to weather market cycles, before volatility happens. That said, there is a natural tendency for investors to want to move into safer investments during market downturns, hoping to avoid further losses. This can be counterproductive during the recovery period and hinder your overall progress towards achieving your goals. A better way to approach is to evaluate your long-term plan regularly to make sure it’s actually on the right track.
Finally, get professional advice when your portfolio gets too complex or if you have reached a stage in your life where you do not have the time to devote to the management of your investments. Working with an advisor can mean having a dedicated professional helping you create and manage your investments, or they can be an objective sounding board for your ideas. Either way, choose someone you can trust and someone who shares your investment approach.
This information is not investment advice and should be used only in conjunction with a discussion with your professional investment advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information.
Leigh Cunningham, is vice president and director with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund.