Why slow and steady investing strategies win the race
Chasing a hot stock tip in pursuit of big returns may sound exciting, but when growing a portfolio, the tale of the tortoise and the hare still makes the most sense.
So you want to be a superstar investor and zoom to the top of the markets? Better to settle down and take it slow, recommends Martin Lefebvre.
While tales of get-rich-quick investors who bought into sure things and sold at exactly the right time may sound exciting, when it comes to actually growing a portfolio, the tale of the tortoise and the hare still makes the most sense, says Mr. Lefebvre, vice-president, chief investment officer and strategist at National Bank Private Banking 1859.
“Investing in a slow and steady way means better chances of achieving your goals,” he says. Advisers and fund managers know that the key to better success is not how often you trade or how you anticipate market timing, it’s how soon you get started in building a portfolio. “You’re better off putting in $10 each month than $120 at the end of every year. The sooner you start, the more compounded the final results will be,” he says.
If you’re a high-net-worth (HNW) individual investing considerably more than $10 per month, being slow and steady may not seem as exciting as day trading. But it’s a more successful strategy, says Mr. Lefebvre. “For long-term investors, being boring can be characterized as good.” Slow and steady doesn’t even need to be boring – unless you find it boring to watch a portfolio grow incrementally with minimized risk.
“Different people have different investing styles and personalities,” says Sandra Foster, Toronto-based financial author and President of Headspring Consulting, Inc. “Over the long term, ‘slow and steady’ should mean less risk than the portfolio that might shoot up quickly.”
Aiming low-volatility holdings
Ideally, a slow and steady investor could set up a portfolio of low-volatility holdings, forget about it for 40 years and then come back and enjoy the wealth that had compounded while the portfolio was being ignored. Not many of us have that kind of luxury, though – even HNW investors need to have liquidity requirements, which means that from time to time they need to sell investments that are growing comfortably and slowly.
A slow and steady approach becomes all the more important in this kind of situation, says Mr. Lefebvre. Otherwise, it’s tempting for investors to succumb to fear and sell when markets are dropping, or overpay when they try to time the market.
“The worst moves you can make are to lose track of your objectives and forget the constraints you set up,” says Mr. Lefebvre. For example, it’s a bad idea to concentrate a portfolio too much because a new super-stock is rising, or to try to anticipate when a market is at its peak or at its bottom.
A slow and steady portfolio might lag behind major indexes in good times, but it will still follow the trend, going up in sync with the indexes more gradually. In bad markets, it might drop, but less than the indexes. Over time, it will outperform.
It’s important to build and keep a slow and steady portfolio that’s diversified, says Mr. Lefebvre: “Diversifying assets among various asset classes drastically reduces diversifiable risk.” In other words, it spreads the risk when a portfolio includes bonds as well as low-volatility equities spread among different sectors and markets. “You can define the role of each type of investment in the portfolio,” says Ms. Foster. “It can be built on the investor’s goals.”
As well, investors who are committed to a slow and steady approach are less likely to overreact to market moves that turn out to be temporary or minor. Building a slow and steady portfolio enables investors and their advisers to put some structure into their investing – “a base language and roadmap,” adds Ms. Foster.
“This can be helpful to address other financial issues such as tax, retirement and estate planning. And it can be tweaked if your situation changes,” she says. Mr. Lefebvre acknowledges that from time to time, slow and steady investors may look enviously at others who made more money faster with more aggressive portfolios.
His advice? “Make sure you compare apples with apples when your neighbours tell you they outperform your returns. As in nature, what goes up must come down. A riskier portfolio will do well in good times, but will underperform in bad times.”
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Edited on 22 December 2016