Weekend Reading: Investors Fighting The Last Battle Edition

Investors Fighting The Last Battle Edition-1

I’ve been looking for a phrase that captures the odd behaviour that investors exhibit when they change strategies based on current market conditions. Ben Carlson at A Wealth of Common Sense neatly summed up this behaviour as investors always fighting the last battle. It’s perfect:

“Not every investor does this but there is a tendency to invest money into the speculative stuff only after it rockets higher during a bull market and invest money into the defensive stuff only after it protects capital during a bear market.”

Investors pour money into the latest fads long after the incredible returns have been made. This happens at the micro level with individual stocks and sectors (think Tesla, or cannabis). It happens with star fund managers and thematic ETFs (Cathie Wood’s ARK funds). It happens when certain investment styles outperform (like the large-cap growth, technology-heavy NASDAQ), or a country or region outperforms (like the S&P 500). It happens with speculative investments (like crypto and NFTs).

I get why investors fall for the hype. There’s a potential paradigm shift or new normal, and they don’t want to get left behind. But it’s classic performance chasing that never ends well. 

Out-sized returns don’t last forever, so when the bubble bursts, investors who loaded up on risky assets inevitably bailed out and looked for safety.

That reckoning came in 2022. The riskier the asset (or frothier the price), the harder it fell (crypto, thematics, tech stocks, NASDAQ, S&P 500). 

Investors who ignored their risk tolerance from 2019-2022 have suddenly become ultra-conservative, loading up on short-term GICs and cash while they wait for the market to settle down (whatever that means).

On the flip side, retirees who saw the bond portion of their portfolios get hammered last year are moving into dividend stocks and the latest income fad, covered-call ETFs.

The problem is we’re always fighting the last battle. We see last year’s best performer and decide to follow that strategy. But that strategy may have only worked in that specific situation for that specific time period. You can’t go back in time and invest with perfect hindsight. You need to invest with future expectations in mind.

And because we don’t have a crystal ball to see how this all plays out, we need to follow a risk appropriate strategy that we can live with in good times and bad. That means having a bit of FOMO when other strategies are performing better, and having some degree of humility when your investments outperform.

It’s that long-term approach that leads to better, more reliable outcomes for investors. Not constantly fighting the last bull or bear market.

This Week’s Recap:

I’ve received a lot of great feedback from my post last week on the best uses for your TFSA. It’s nice to hear that so many of you acknowledge the many uses of a TFSA (not just to leave a pot of tax-free gold in your estate).

Many thanks to Rob Carrick for highlighting eight ways retirees can save on tax in his latest Carrick on Money newsletter.

Our new house build is coming along nicely. The cabinets were installed this week, and next week is the first round of finishing carpentry. We don’t have a possession date yet, but now it’s looking like mid-April.

Meanwhile, all is quiet on the home selling front. Hopefully with a conditional pause on rate hikes and some good news on inflation we’ll start to see some more activity in the coming month or so.

Promo of the Week:

If you’re looking to start DIY investing with ETFs, or looking to break up with your expensive mutual fund advisor, then you need to check out my DIY Investing Made Easy course.

You’ll find videos explaining why investing has been solved with low cost ETFs, and why investing complexity has been solved by using a single asset allocation ETF. You’ll learn all about these asset allocation ETFs, including which one is the most risk appropriate for you.

I’ll explain which online broker makes the most sense for your situation, and I’ll show you platform-specific videos on how to open your account, add new funds, transfer existing funds, and how to buy and sell an ETF.

You’ll have all the resources you need to become a successful DIY investor, including access to me by email if you need any extra guidance.

Weekend Reading:

A few of you asked what podcasts I listen to regularly. Here’s a list of my favourites right now:

  • Rational Reminder – hosted by Ben Felix and Cameron Passmore of PWL Capital, this is hands-down the best podcast for investing and financial decision making.
  • I Will Teach You To Be Rich – hosted by Ramit Sethi, this is a look into the lives of couples and money psychology. Every episode is fascinating.
  • Cautionary Tales – hosted by Tim Harford, who has the best podcast voice in the business. Wonderful story telling, and there’s always a great lesson in each episode.
  • Animal Spirits – hosted by Michael Batnick and Ben Carlson of Ritholtz Wealth Management. They’ve got a great formula to keep you up-to-date on what’s happening in the market and in their lives,
  • Money Feels – hosted by Bridget Casey and Alyssa Davies, this is personal finance talk without the usual guilt or shame.
  • Stress Test – hosted by Rob Carrick and Roma Luciw, this personal finance podcast looks at the real issues facing young Canadians today.

Speaking of Ben Carlson, congrats to Ben on 10 years of blogging at A Wealth of Common Sense. That’s a decade of consistently posting every weekday – absolutely incredible!

Where do millionaires keep their money? Of Dollars and Data blogger Nick Maggiulli says it’s not where you think.

The Measure of a Plan has updated the investment returns by asset class from 2010-2022. The best (or least bad!) asset in 2022 was short-term treasury bills at -5.2%. The worst? REITs at -31.1%.

Are Canadian dividend funds all they’re cracked up to be? Morningstar dives into the data and says the results are mixed:

“On a trailing 15-year basis, investors in dividend funds have ended up more or less in the same spot as those invested in Canadian equity funds.”

This is what I found in my investing multi-verse of madness post – I could have achieved a similar return had I stuck with my Canadian dividend stocks, but I would have done a heck of a lot more work to get the same outcome.

If 2022 wasn’t the worst year for investors, then when was? Millionaire Teacher Andrew Hallam has the answer.  

Tim Kiladze on the high-yield, but defensive ETFs that Canadians can’t get enough of: Covered-call funds. (subs)

How to make the most of your investments in retirement? Why a long-term, cash-flow driven approach to your retirement portfolio is key to success.

Finally, here’s an opinion piece on the cruel and unusual torture of doing your own taxes.

Have a great weekend, everyone!

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  1. Gill on February 19, 2023 at 12:41 pm

    Hi Robb. I turn 71 in October of this year. I have a spousal RRSP and a personal RRSP which I realize will become RRIFs on my birthday. Because my personal RRSP is worth about $15,000 I am thinking of cashing it in entirely and putting the money into GICs. Or would it be better to take $15,000 from my spousal RRSP to reduce the dollar amount I will be forced to take from my personal RRSP after my 71st birthday? I enjoy and appreciate your column – thanks.

    • Robb Engen on February 19, 2023 at 2:46 pm

      Hi Gill, thanks for the kind words.

      Gill, it’s impossible to answer your question without knowing a lot more information about your situation, your spending needs, and your other resources and sources of income.

      Note that you don’t have to convert your RRSP to a RRIF on your birthday, but by December 31st of this year, and you won’t need to make a withdrawal until the end of 2024 (and only the minimum mandatory required amount).

  2. Kevin Marks on February 19, 2023 at 2:29 pm

    Hi Robb,
    Congrats on the progress towards your new home.
    If it’s not too personal, would you discuss how you decided on what type of mortgage you settled on. Terms, considerations, etc?
    Thank you,

    • Robb Engen on February 19, 2023 at 2:54 pm

      Thanks Kevin!

      We’re stuck in a Flexline (open line of credit) right now because of our financing arrangements with the new build (they take draws at various stages). So the interest rate is painful (at prime) right now.

      Upon possession we can negotiate a conventional mortgage, but we also need to consider that we want to dump a big chunk of the proceeds from the sale of our existing house onto the new mortgage…and the house may not have sold by then.

      My mortgage strategy has always been to take the best of a either a deeply discounted five-year variable or a 1-2 year fixed rate. It’s looking like the short term fixed rate would be the best (or least bad) option right now.

      I’ll definitely share more when I have some more certainty as to what we’re doing.

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