There is so much information in the investment world, theories, strategies, and academic papers of how to increase your wealth. Buy and hold, buy on the dips, hedge the downside, buy on the breakout, you can never lose if you sell for a profit or follow the smart money. There's too many to list here, but that's the beauty of the stock market, you get to invest using known information and an unknown future. And the results of your investment decisions show up every day in green and red. It's almost poetic!
But if you want to know what your core long-term strategy should be, look no further. The caveat is that the long-term is not one month, one year or even five years; it’s the "long-term", which basically means for your lifetime. If you can commit to investing for your entire life, well there you go; you have the best strategy in the world. The premise is to invest and invest often. In its simplest form it's called dollar-cost averaging, but what you are really investing on, is the fact that you want to be a long-term owner of companies, whether it be in the US, Canada or globally. If you believe that over time, the majority of companies will grow, develop new products, expand to new markets and increase earnings, then you are an optimist and should continuously invest your money. History has shown being an optimist is a wonderful view to have!
S&P500 since October 1977 1
Let's break this down further into an executable strategy. The best time to start if you haven't already done so, is now. Start with what you can afford and setup automatic payments, a logical choice to access the US market would be the S&P500. The S&P500 is the 500 largest companies listed on the NYSE and the NASDAQ. These payments should be automatic, so that you don't even notice them coming out of your paycheck. Start with whatever makes sense and what works for you. The key to the strategy is to invest often and never stop. When markets rise, you will be paying a higher price and when markets drop, you will be buying companies at a discount. Now commit every year to increasing the amount of your automatic payments. Don't worry about the front page financial headlines, just stay steady and continue to invest increasing amounts every year.
This strategy has been around for a long time, even Warren Buffett wrote in his 1993 Annual Shareholder's Letter, that says it all, "Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases.” There it is the best strategy in the world, clear, concise and in print, but one that most investors have a hard time following. It comes down to time in the market, not timing the market and before you know it, you will have amassed a great investment portfolio.
There are two other stats that I would like to discuss: 1) the impact of client behavior and 2) the use of an advisor. Both show the impact of behavioural finance and how emotions heavily impact investing decisions. The reason most investors negatively impact their investment portfolio is emotion and the underlying construction of their portfolios. Human emotion is the number one reason why the markets are not 100% efficient. As long as investors remain human and feel the entire range of emotions including greed, fear, pressure and doubt, there will be money to be made by those who steel themselves to overcome emotion.
Warren Buffett has mentioned a few times, that humans who interact with the stock market are irrational. When a consumer makes a purchase, they are looking for the best deal. Think about a shopping mall on Boxing Day, when there are tons of items on sale, most consumers will line up to make a purchase! But in January, when the prices rise, the malls are empty and consumers will wait for the next deal. This makes perfect sense, but the complete opposite occurs in the stock market. When the price of a stock rises, investors will get excited, greed sets in, demand increases, pushing the stock market higher which can lead to over valuations. When the price of a stock falls, investors sometimes panic and start selling, which can push the price down further.
A global study of investor returns by Morningstar Inc. of Chicago has found that mutual fund performance experienced by average Canadian fund investors is worse than that of the funds they hold. The gap between investor returns and fund performance is largely attributable to the performance-dampening behaviour of investors, such as buying high and selling low. When all fund categories are considered, the Morningstar study showed the average Canadian fund gained 8.42% over the five-year period ended Dec. 31, 2016, vs a smaller 7.33% for the average fund investor — a 1.09 percentage point lag for Canadian investors.2
Vanguard released a study, Advisor’s Alpha, that shows clients who work with a good financial advisor will receive on average a 3% increase in the value of their portfolios each year. The majority of this increase will come during periods of heightened greed and fear in the markets, when advisors can step in and help their clients maintain an even keel and keep their long-term objectives in sight. And additional research suggests that advisors can have a positive impact on their clients’ financial plans in other ways as well. The Investment Funds Institute of Canada released a report back in 2012 titled the Value of Advice Report, and this report revealed that clients who paid for financial advice have a 1.5 times higher probability to stick with their long-term financial plan than those who didn’t. This shows that while good financial advice can be beneficial in the short run, it can be exponentially more profitable for investors over longer periods of time. The Canadian study also shows that those who pay for financial advice also often enjoy a higher quality of life, as they can rest secure in the knowledge that their advisor is taking care of them.3
2 http://www.investmentexecutive.com/-/the-damaging-behaviour-of-mutual-fund-investors
3http://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp