Don’t let these investing pitfalls hold you back in 2023
Canadian money managers are weighing in on the most common mistakes retail investors make.
From trying to time the market to not cutting losses early enough or chasing market trends, these institutional fund managers are also offering ways to avoid these pitfalls as we head into 2023.
Timing the market is something Allan Small, a senior investment advisor at Allan Small Financial Group with iA Private Wealth, says he frequently sees among retail investors, often with little success.
“Getting out of the market when things look bad to try and get into the market when things look better – you never time it right. You tend to sell out near the bottom and by the time you get back in, the market is already up quite a bit,” he told Yahoo Finance Canada in a phone interview.
He said getting the timing correct is so difficult because financial markets are some of the best forward-looking mechanisms around. While the current environment might be tough, the bad news might already be priced in and the market could be rising since it’s looking six to 12 months in the future, he added.
However, Small says that doesn’t mean investors should blindly stay the course with their portfolio holdings.
‘It’s not buy and neglect, it’s buy and evaluate’
When clients are panicking during market volatility, Small said it’s prudent for investors to analyze their portfolio (both the unrealized losses and the gains), revisit their investment objectives and determine whether adjustments should be made.
While “everybody hates to sell a loser,” he says investors need to determine whether they can make their money back quicker by investing in another security rather than waiting for their existing holding to bounce back.
“It’s not buy and neglect, it’s buy and evaluate,” he said.
Philip Petursson, chief investment strategist at IG Wealth Management, agrees that investors are prone to panic near market tops and bottoms.
“This has been the case over and over again with investor interest in crypto, pot stocks, tech etc. but also with selling at the wrong time - December 2018, March 2020 and this past summer,” he said via email.
“We constantly remind investors that past performance is not indicative of future performance. This works in both directions and investors shouldn't let the weaker performance in 2022 scare them off of investing in equities in 2023.”
Chasing trends
In Dennis Mitchell’s experience, he constantly sees investors wanting to chase trends; that is, make investment decisions based on a trend that has been in place for some time. Chasing trends risks entering a position too late to reap the benefits.
“If a stock moves up enough or for a long enough period, many investors will abandon their carefully crafted, long-term investment strategy to chase after immediate returns,” Mitchell, the chief executive officer and chief investment officer of Starlight Capital, said via email.
“The best way for investors to avoid this mistake is to spend more time focused on their strategic goals and almost no time looking at daily returns.”
He suggests investors conduct reviews of their portfolio strategies on a quarterly basis.
“Avoiding the temptation to review this plan or their investments between quarterly reviews will likely eliminate much of the biases that investors fall victim to. The key is knowing why you own the stocks you own and keeping the long-term goal as the focus of your reviews, not short-term trading activity,” he said.
Throwing good money after bad
One investment philosophy Bryden Teich, a partner and portfolio manager at Avenue Investment Management, lives by is to make small mistakes and take losses early.
He said he often sees retail investors tolerate massive losses on a stock because they’re convinced the company is a good investment.
“I think it's very hard to admit you're wrong on an investment or change your mind,” he said in a phone interview.
“And the problem is, if you ride things down 50, 60, 70 or 80 per cent, you've lost such a large portion of your initial investment that it's almost impossible to make that back.”
What’s worse is sometimes investors will resort to “throwing good money after bad" and put more money into the stock once it’s sold off, he said.
There are a few ways to prevent this from happening.
Teich said when his firm buys a stock, they usually set a price to sell it should the investment not work out as expected. A more rigid method would be to set a hard stop-loss in your portfolio, which would trigger the sale of a stock when it falls to a predetermined threshold, though his firm doesn’t typically set hard stop losses.
By cutting losses early, it gives the investor time to see how the stock’s downturn plays out, at which point they could buy it back if they choose to do so, he said.
“I would say that's something I see very commonly from all investors because people want to believe that they're right. But oftentimes, it's far better to take your money back and not ride a position down because that's how you lose a lot of money,” he said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
Download the Yahoo Finance app, available for Apple and Android.