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.

Sometimes it just feels wrong, provoking anxiety or, worse, failing to achieve the goals you want or need.

Let’s look at a few investing styles and see how they work – it might make it easier to pick one that fits like your favourite pair of shoes.

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.”

Why GM? “It’s had a bad phase, but the lawsuits are over, the U.S. car fleet is aging and sales are up, and there are emerging market opportunities in China and Latin America.”

Caveat: value investing does not include gambling on start-ups or “binary option” companies, defined as those that succeed or fail based on a win-or-lose proposition – a cure for a single disease, for example.

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.

While it’s getting pummelled right now, it’s a good bet oil prices will start going back up someday – so investing now might be a bargain. Helkie says it’s all about risk tolerance; those with less of it tend to be top down and aim for greater diversification.

“However, if you’re the kind of investor who can handle market fluctuations, you’re probably more bottom up.”


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?

No, it means buying low and selling high, a strategy that worked out rather well for Warren Buffett.


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.

Tactical asset allocation, on the other hand, rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.

For example, tactical asset allocation allows for a certain range in each asset class. This is suitable for an active investor who is looking for a more hands-on approach to investing and is comfortable with volatility and risk, he says. It is important to note that diversification across asset classes is essential in order to reduce overall risk and improve portfolio returns.


Dividend Investing

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.

Bushell says he typically makes recommendations based on a company’s sustainability. “You want a company with a long-term runway for its business,” he says. “A question we often ask is: is this a company that’s going to be around in 50 years?”

Good examples of the strong include Canadian Banks such as TD and RBC, telecoms like BCE and Rogers, utilities like Fortis and railways like CN. “CN has raised its dividend every year since it became a public company a couple decades ago,” notes Bushell.


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.

They’re also the kind of investors who have to get used to being thought of as a little off their rocker for not running with the herd, but then they’ve been dealing with that since they first wore saddle shoes to high school when everyone else was wearing Air Jordans!