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Ottawa, ON

613 868 3950

The Canadian Financial Advisor

How do you invest?

Benjamin Felix

What’s the first thing that comes to mind when you think about an investment professional? They must be able to pick the best stocks, the best industries, and the best geographies to invest in over a given time period. “Apple is hot right now”, and “China is going to be huge this year!” might be things that you expect me to be able to tell you. I don’t think that anyone can do that, especially consistently, and the data agrees with me. Only a small percentage of people that try to pick stocks and time the market end up having performance that is better than the market itself, especially after the costs of trading and research associated with this style of investing. Finding the small percentage of people that will outperform the market before they actually do it is equally challenging. So if the traditional method of trying to beat the market doesn’t work, it makes sense to accept the returns of the market at a low cost using inexpensive tools that hold the whole market, like ETFs. That makes sense, and it’s easy to do, but the question of which market we are going to buy comes next. Just like we don’t want to bet on any one stock, we don’t want to bet on any one market. The solution is to build a portfolio that is globally diversified; by not betting on any single market we are reducing the overall volatility of the portfolio while positioning ourselves to avoid missing unexpected growth. Not many people expected US markets to perform so well in 2013, potential for a large missed opportunity. To further eliminate placing emphasis on any single market, we build globally diversified portfolios with equal equity allocations split between US, International, and Canadian markets. Coming back to the US market in 2013, it would have been very easy to become emotionally attached to the strong performance. Buying more US stocks seemed like the smart thing to do. We eliminate emotional investment decisions like that by rebalancing the portfolios back to their target allocations. Rebalancing is a systematic process of selling off asset classes that are performing well and buying asset classes that are performing poorly; it is a rules based system of selling high and buying low, and it decreases portfolio volatility while increasing expected returns.

The last piece of this story comes from robust academic research performed on all of the available data from markets around the world. It has been found that certain types of stocks exhibit stronger performance than others. Research has shown that throughout history, small stocks and value stocks have outperformed the market. When we invest in a market, we add a tilt toward these types of stocks. A tilt is best described as an increased amount of these types of stocks relative to the market. If the US market has 4% small value stocks, our portfolio might have 11%. In the same way, research has shown that large growth stocks have lower expected returns than the market, so we tilt the portfolio away from these types of stocks. If the US market has 17% large growth stocks, the portfolio might contain 5%. Our style of investing is market based, globally diversified and rebalanced, with tilts toward small cap and value.