Weekend Reading: Investor Bias Edition

Weekend Reading: Confronting Investor Bias Edition

Home country bias is when investors overweight domestic stocks relative to their weight in the global market. Canadian investors tend to suffer from home bias, but this is also true of investors in most countries. It’s particularly troubling in Canada where our stock market is highly concentrated in the financial and energy sectors.

A related investor bias that I’m seeing more and more is something I’d call “industry bias”. This is where technology workers tilt more of their portfolio to tech stocks, and oil and gas workers invest more in energy stocks, etc.

There’s also regional investor bias. If you live in oil country you’re more likely to invest in those companies, and if you live in Silicon Valley you’re more likely to invest in technology firms.

I’d consider these more dangerous than home country bias because it further concentrates your portfolio in one particular sector of the market and misses out on key diversification benefits. An even more extreme example is when an investor’s entire portfolio is made up of his or her own employer’s stock – whether through an employee stock purchase plan or stock options.

I understand the idea of investing in what you know. But picking individual stocks in one particular industry just because you live or work there doesn’t make any sense. Any insider knowledge or advantage you think you have is already priced into the market.

Furthermore, tying your retirement portfolio to your own employer’s stock is equally unwise. Employees who find themselves in this position would be smart to move away from such a concentrated portfolio and adopt a core-and-explore approach with 90 percent of their assets in a low cost, globally diversified portfolio of index funds or ETFs, and leave 10 percent or less to their employer stock or industry sector.

This Week’s Recap:

Earlier this week I wrote about how index funds compare to equity mutual funds. All the banks offer index funds that cost less and have performed better than their expensive equity mutual fund counterparts. So why don’t you ever hear about them?

Over on the Young & Thrifty blog I reviewed the robo-advisor WealthBar.

A reminder, on September 26th I’ll be hosting an AMA (ask me anything) on Reddit Personal Finance Canada.

Many thanks to those of you who signed up for the $199 financial planning service. This ‘light-advice’ service is designed for those who can benefit from someone taking an objective look at their finances, highlighting any ‘gaps’ or potential areas for improvement, and getting some actionable takeaways to implement on their own.

If you’d like me to look at your finances and address your ‘money gaps’ just complete this questionnaire, identify your one financial area of importance, and I’ll follow up to analyze and address the ‘gap’.

Promo of the Week:

The Canadian Financial Summit goes live this week, with sessions beginning on September 26th. There’s such a great variety of topics and speakers this year. You’ll hear sessions on asset allocation ETFs, robo-advisors, solving the RESP puzzle, renovating your house on a budget, insurance in retirement, and so much more.

My session on retirement readiness will go live on September 27th. You’ll want to catch the entire conference live with this free ticket.

Can’t catch everything live? Not to worry. Get instant lifetime access with an All Access Pass for just $87.

Weekend Reading:

Stephen Weyman at Credit Card Genius shares the best credit cards for shopping at Costco.

I took my family of four to Europe on Aeroplan miles and only paid a few hundred dollars in taxes and fees. That’s because I flew on United Airlines instead of Air Canada, and United doesn’t impose fuel surcharges. Here’s a comprehensive guide to Aeroplan’s fuel surcharges to help you avoid the fees.

Bryan Borzykowski helps us understand the chatter around negative interest rates in his latest MoneySense column.

Here’s why don’t-pay-till-you-die reverse mortgages are booming in Canada.

Andrew Hallam explains why your returns might be better with all-in-one ETFs than with individual funds.

Morningstar’s latest research on mutual funds is out and Canadians get a below average grade on fee experience.

Not every risk in the market is about to pop. Why we love to call everything a bubble:

“I have often thought that we are all products of when we ‘grew up’ in the market. So, for example, folks who grew up in the ’70s are always looking for inflation. Those who grew up in the ’80s are always on alert for a crash.”

Josh Brown and Nick Maggiulli, of Ritholtz Wealth Management, discuss data on investing a lump sum vs dollar-cost averaging, and the results might surprise you:

Jason Heath says the real ‘advice gap’ when it comes to financial planning has nothing to do with investment products.

Michael Batnick offers a behavioural prescription for dealing with volatile markets:

“There have been 17 separate 5% pullbacks since stocks bottomed in 2009. Each one of them felt like the top.”

The Blunt Bean Counter shares an entertaining post about investing like your grandmother or grandfather.

Here’s Jason Heath again answering a reader question: Will selling my house help me retire sooner and more securely?

Tim Cestnick says the lessons learned from this TFSA story gone wrong could save you a huge headache.

Finally, a huge congratulations to Million Dollar Journey blogger Frugal Trader, who recently reached a cross-over point with more than $53,000 in dividend income.

Have a great weekend, everyone!

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1 Comment

  1. Dale Roberts on September 22, 2019 at 12:44 am

    Great post Robb, thanks. I have penned on that home bias, and in posts I admit to my own. And sector bias, check. Ha. But I count Canadian dividend income as priority #1 (always to each his or her own 🙂

    Most certainly should use a well diversified index-based approach.

    Canadians in the ETF space have just a slight over-representation of Canada compared to US and International assets. That’s not a big problem IMHO. There’s nothing wrong with an even mix of those 3 stock buckets – the Tangerine approach, except for their dividend offering.

    The key is to have those US stocks to fill in the Canadian sector holes. And International fills in even more.

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