When you think of investing in the stock market, does the word “casino” come to mind?
Many people equate putting money into the stock market with gambling and that is usually because they have had a bad experience with the markets or they know someone who has.
There is a big difference, however, between investing and speculating and it is the latter that usually draws out one of the biggest causes of losing one’s savings — emotions. Once you let your emotions take control over your investment decisions, it’s usually just a matter of time before you see your accounts decline in value.
Over and over again, we hear of that hot stock tip about a little-known company that “the smart money” is going into. It’s this excitement of making a quick buck that can convert an investor, who is in it for the long haul, into a speculator, who is about to find out just how risky averaging down on a stock can be — especially if there has been little or no effort to determine the fundamentals that support its current price or future value.
And if this stock continues to decline in price, more money is often thrown at this losing battle with the expectation that it will once again climb to its former glory and take the speculator along with it. This is when the relationship is in full swing and one begins to feel “married” to the stock. Instead of making wise investment decisions, this emotional attachment provides a clouded rationale for continuing to hold on.
There is no shame in taking a flyer on a stock and we have all heard some of the tremendous success stories that have made many people a great deal of money. But in order to prosper through investing in companies, an investor needs to take emotion out of the process.
I have always maintained that you will never go wrong with a well-balanced portfolio. This should be the core of an investment portfolio with a balance between income and long-term capital growth through investments in a variety of Canadian, U.S. and international equity and fixed income securities. Once the core of the portfolio is established and maintained, then one might explore investment in specific tactical areas to take advantage of economic or cyclical shifts that occur from time to time with no more than 10% of the overall portfolio going to any one specific security.
This “core and explore” approach has served many long-term investors very well over time. Ultimately, however, those who typically enjoy the most consistent and predictable returns from the markets are those who have been able to keep their emotions out of their investment decisions.
Doug Riding BA, CFP, FMA
Senior investment adviser with IPC Securities Corporation