10 guidelines for savvy investors

The Gazette (Montreal)
December 29, 2003

Avoid prime mistakes that investment pros see ordinary investors make time and again

By Keith Woolhouse, CanWest News Service

This is the time of the year for resolutions, when vows are made to not repeat mistakes of the past. Knowing what to do — or in this instance, what not to do — is easier said than done. That’s why many New Year resolutions live and die in January.

Here are 10 guidelines that might help your disposition and your portfolio. These are the prime mistakes that investment analysts, who are entrusted with clients’ finances, see ordinary investors making time and again.

Don’t flip-flop: A lot of investors rush into stocks when the market starts to rise. When the market goes down, they join the rush for the exit. That’s the herd mentality, but just because everything is up doesn’t mean it’s time to buy, any more than when everything is down means it’s time to sell. Remember, the herd is not always right. Have a plan, determine what you want to accomplish, and stick with it. — Noral Rebin, CIBC Wood Gundy.

Don’t get greedy: How often have you regretted a decision to hold on to a stock when it has soared, then watched it fall back, wiping out all gains. That doesn’t mean you should buy and sell at random, but it would help if you set a target price — and stuck to it. Memo: leave something on the table for the next guy. — Benj Gallander, Contra the Heard.

Don’t restrict your stocks to one sector: Diversification is the name of the game. That’s the same as saying, “Don’t put all your eggs in one basket,” because if you do, there’s a good chance you’ll wind up at the end of the day with less than you started out with. You wouldn’t just buy one stock, so why would you buy just one sector? Spread the risk and increase your profits. — Jayann Lennon, Edward Jones Inc.

Don’t fall in love with your stocks: How many times have you heard, “I can’t sell that stock, I like it?” Look, if a stock goes into the dumpster, get rid of it. You bought it as an investment, not to become part of the family. Whether a stock is going up or down, it doesn’t love you back, so you owe it nothing. Know when to buy, and know when to sell. — Gallander.

Don’t let your emotions rule: When you have to make an investment choice, the right decision is quite often the one that feels the worst. It could be selling your bonds at the top of the market and buying stocks when they’re out of favour. But buying low and selling high is still the name of the game. Staying true to your investment philosophy will help this. — Joanne Livingston, ScotiaMcLeod.

Don’t forget income: The lure of growth investments sometimes blinds investors to the fact that slow and steady is still a good way to make money. So make a place in your portfolio for a guaranteed investment certificate (GIC) or a bond or any instrument that guarantees a return and preserves your capital. — Rebin.

Don’t confuse cheap with inexpensive: Just because a stock is priced low, doesn’t mean that it’s a good buy. Don’t believe that a low-priced stock is necessarily cheap. Cheap stocks can always get cheaper. You have to work on the percentages. How much can you lose on a 50-cent stock? All of it! Bear in mind that if a $5 stock drops to $4, you’ve lost 20 percent of your investment. — Gallander.

Don’t ignore your stocks: Buy and hold doesn’t mean that you should buy and forget. You have to stay on top of your investments and that means reading the financial press and the companies’ annual reports. The more research you do, the fewer nasty surprises will come your way. — Lennon.

Don’t buy into the hot tip: If it’s truly an inside tip, it’s illegal. If it’s not, then it’s not a hot tip and you’re likely getting it third-hand. By the time it reaches your ears, it’s stone-cold dead in Toronto or New York. — Rebin.

Don’t be a trendy investor: This is the flavour-of-the-month syndrome. When Nortel was trading at $120, those people who didn’t want to buy the stock at $25 felt they had to have it. Many investors want to buy winning stocks after they’ve already had their run up. By then it’s too late. — Livingston.