The Perfect Fit
It’s not just for shoes but for an investing style that’s right for you.
It’s happened to us all: you see someone at a party wearing a natty jacket that you feel would be a great addition to your wardrobe.
So you go out, purchase one, take it home, put it on and, uh oh, it’s just not you.
The same happens when we invest; there are myriad approaches and styles to choose from, but what works best for one investor doesn’t necessarily work for another.
Growth vs. Value
According to Barry Schwartz of Baskin Wealth Management in Toronto, growth and value investing are both strategies for accumulating stocks that are going to appreciate in value, but there the similarities end. Growth investing involves buying stocks in companies that have very high valuations relative to their current earnings and could include such familiar names as Netflix, Twitter, Facebook, Amazon and Tesla.
“The problem with these stocks is that all the excitement has already been priced into them,” he says. “They’re already pricey, but despite that, investors continue climbing on board because they believe in the product or service they offer and that the stock will continue to rise – and it just might. Value investing, on the other hand, suits those with a capacity to suffer because it involves “unsexy” stocks like General Motors that are suffering what he calls temporary but solvable problems.
“These are stocks that have been marked down so much they have a margin of safety built into them.”
Top Down vs. Bottom Up
According to Lee Helkie of Helkie Financial & Insurance Services in Toronto, top down and bottom up are two different but compatible methods of investing.
“Top down is about looking at the economy as a whole and trying to figure out where things are going,” she says. “It’s a broad-based way to look at the market.”
A good example is when an investor thinks that because interest rates are low, sales of consumer goods will endure or expand with it. Bottom-up investing, on the other hand, involves looking at specific sectors.
For example, if you live in Vancouver where there’s a building boom and condo towers are going up like hemlines in a bull market, you might think it wise to invest in concrete. Likewise investing in the energy sector.
Buy and Hold
This involves acquiring stocks and then hanging on through thick and thin. Actually, says Marybeth Fenton of BMO Nesbitt Burns in Halifax, it frequently requires “rebalancing” based on an individual investor’s profile – an asset mix formula originally designed based on risk tolerance, capital growth objectives and income needs.
That’s because what you buy up front can change in value over time and affect the overall “weighting” of a portfolio. A good adjunct to the strategy includes what she calls “dynamic asset allocation,” a process of “shaving off some of your best-performing asset class and adding to one of the ones that has been underperforming.”
Does that mean selling winners and buying losers?
Tactical vs. Strategic Allocation
Strategic asset allocation involves setting target allocations and periodically rebalancing a portfolio back to those targets as investment returns skew original asset allocation percentages, says Blair Guilfoyle, a second-generation CFP at Guilfoyle Financial in Toronto.
He adds that target allocations can also change with shifting time horizons around such events as buying a home, saving for the kids’ education and impending retirement.
“This is very similar to a buy-and-hold strategy, as opposed to active portfolio management, which is why it is best suited to passive investors,” he says.
Want to make sure you have enough money to get through retirement?
Go long on dividend-paying stocks, says Dona Eull-Schultz and Ryan Bushell of Leon Frazer in Calgary.
A dividend payment is cash-in-hand, and having that can take the sting out of market fluctuations, says Bushell. “Not only do these payments help get people through the ‘market sentiment’ cycle, they provide ready cash without driving down the overall value of the portfolio.”
Eull-Schultz adds that companies currently paying dividends have a tendency to increase them over time – helping compensate for inflation – and are equally loath to reduce them because it can be fatal to share prices; investors immediately assume the reduction is an indication of crisis.
Cue the Contrarian
Have you always been the non-conformist in the crowd, consistently eschewing fads and wearing what you want? Perhaps you’re a contrarian, defined by Stephen Fletcher of Odlum Brown in Vancouver as someone who “looks for opportunities that are missed by the herd and gets in early.”
It’s not that the herd is always wrong, he adds, it is just wrong – usually – at the tops and bottoms.
Typically, contrarians know that by the time they read about it in the newspaper, it’s too late, and they tend to buy when everyone else is selling and sell when everyone else is buying.