Stock markets in Canada and around the world continue to defy expectations. If investors are nervous about interest rate hikes and household debt, they aren’t showing it. Record highs have been the story of 2017 so far.
Stock tips gain more traction than usual at times like this. But buyer beware. For every penny-stock dream-come-true there’s an over-anxious investor watching equity returns with bated breath.
To be clear, stocks play an important part in a balanced portfolio. They are riskier than bonds and other investments like guaranteed investment certificates, which means that over the long-term a diversified portfolio of stocks will produce the kind of gains you need for long-term financial planning. There will be periods in which equities perform poorly, but depending on how long you have to go before you plan to retire, you can afford to take on that risk because you have time to recover.
I have a relatively healthy risk appetite, in part because I plan to work, save and invest beyond my 65th birthday. So it's safe to say I have a larger portion of my portfolio invested in company shares than most people my age. But I don't buy stocks in individual companies.Four reasons:
1. I'm not a professional investor.
I can calculate a price-to-earnings ratio with the help of my old Canadian Securities Course textbook. But I'd be hard pressed to come close to an informed conclusion about whether a company's share price is over- or undervalued. I know enough about stock investing to know that I don't know enough.
2. I don't follow the stock market closely.
I have neither the time nor energy to stay current on the myriad complexities behind equities trends. It's hard enough to find the time to help my daughter with her math homework.
3. I understand the importance of a balanced portfolio.
I hold a mix of funds that include stocks and bonds from around the world. My equity holdings include large, mid-sized and small companies in a variety of industries. I count on the professional money managers who run the funds I’ve chosen to pick a mix of stocks that are aligned with my investment plan and risk tolerance. Buying a stock outside that portfolio throws everything out of whack. Say I bought a Canadian technology start-up. That has the potential to leave me overweight Canada, technology and even small-cap equities. The more the share price goes up, the more I’m overweight relative to the rest of my portfolio. It’s a mistake that millions of investors make.
4. I believe we’re due for a downturn.
My view on buying individual stocks applies in any economy. But it applies particularly to environments like the one we are in now. We’re more than 8 years into this latest Canadian economic expansion. According to data published by the C.D. Howe Institute, the average expansion since the 1929 market crash has lasted a bit longer than 6 years. That makes this a tough market in which to pick winners.
It's not that I've never rolled the dice on a company. In fact, I've done it twice in my life.
The first was a small dot-com stock I got a tip on in 1999. It went down in spectacular fashion (such were the times) with an investor note promising the firm was transforming itself into an incubator.
The second was even more cringe-worthy. I was one of the smart guys that bought Nortel Networks on the way down, after its share price began to fall in 2000.
I lost $1,000 on both of those bets; which is exactly what they were. I'd done no analysis of the share prices, and I had no information on what lay ahead for either company.
Some good did come from the experiences, of course. For just $2,000, I learned an important lesson about myself and investing. Small price to pay.
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