|
|
|
|
 |
|
Market Perspective
Principles of a Successful Investor
 by Ernie Ankrim
Director of Portfolio Research
Frank Russell Company
July, 2000
Russell has built a worldwide reputation based on its well-researched advancements in both strategy and technology, including tools for monitoring investment strategies and analyzing performance. Each year, Russell evaluates over 1,700 investment managers and 5,000 investment products globally. This enables us to choose the active managers within each asset class or investment style who are best positioned to outperform the markets in the medium to long term. From time to time, Russell strategists will share our insights into the markets with our retail readers, just as we do with financial professionals and institutional clients.
Humility, honesty, poise, commitment and discipline — these are all traits we aspire to in everyday life. Yet when it comes to investing we often fall prey to temptations such as greed and envy. When evaluating your investment success, keep in mind that being a successful investor doesn't always mean having the most money at the end of the day.
What Makes a Successful Investor?
When we participate in the market, we don't always behave admirably — often we just want to know how much our investments made or lost. Ernie Ankrim, Frank Russell Company's director of portfolio research, argues that investors can learn to improve their investing experience by paying attention to the values that rule our everyday lives.
Consider Ernie's five principles to invest by:
1) HUMILITY — Accept Reasonable Rewards for Reasonable Risk
Are you disappointed when you don't see "great" returns every quarter? Many investors are. Yet we all know that it's difficult to earn 40% a year without some risk of losing a lot of money. Reflect on the real-life example of the US mutual fund Janus 20. As reported in a 1999 New York Times article, in April 1999 Janus 20 was the best performing large cap stock fund in the US, having doubled investors money since the start of 1998*. Investors flocked to it so quickly, investing US$7 billion in four months, that Janus closed the fund "to [ensure they could] deliver superior performance."
However, by June the fund fell to the bottom of the performance charts. Janus 20 ranked as the 15th worst-performing general equity fund of 4,008 funds in the second quarter, according to Lipper, the mutual fund data company. Investors who rushed into the fund before it closed, later learned to regret their haste. Most of the money that went into the fund poured in just as the fund's performance began to slide.
The lesson is this: staggering returns come with the risk of losing a lot of money. So exercise humility. Be humble enough to accept reasonable rewards in exchange for taking less risk.
2) HONESTY — How much risk can you tolerate?
Sophistication and risk tolerance are not synonymous. Just because your knowledge of investing is high doesn't mean your risk tolerance is.
It's easy to get greedy in a market that's posting returns of 20%, 30%, 40% or more. But are you prepared for a year like 1998 when the TSE 300 fell over 20% in the month of August to end the year down 1.6%? Or the more recent market upheaval brought on by fluctuating technology and communications stocks.
Figure 1. Take a Diversified Approach
| |
|
|
|
|
|
Performance |
|
|
| Country/Region (Index) |
|
|
|
|
|
1998* |
|
1999* |
| United States (Russell 3000™) |
|
|
|
|
|
33.2% |
|
14.2% |
| International (MSCI WRD. EX. CAN) |
|
|
|
|
|
29.2% |
|
20.3% |
| Canada (TSE 300) |
|
|
|
|
|
-1.6% |
|
31.7% |
| Emerging Markets (IFC) |
|
|
|
|
|
-16.3% |
|
57.9% |
| Canadian Fixed Income (RBC DS Market Index) |
|
|
|
|
|
9.1% |
|
-1.1% |
| * Year ending. |
|
|
|
|
|
|
|
|
Be honest with yourself about the trade-off between return and risk. In your quest for returns are you willing to risk a year like 1998 when you could have lost a portion of your investment had you invested in just Canadian stocks? Keep in mind that the person with the most wealth at the end is not necessarily the winner. As long as you're able to meet your goals and are comfortable with your investment, you'll come out ahead in the long run.
3. POISE — Resist the temptation to chase recent winners...They could be tomorrow's losers.
Do you tend to question your investment strategy based on what you read and hear in the news? Top investment performance is not a guarantee of future performance. Consider the following research.
Figure 2. Canadian Equity Mutual Funds Managers
Source: Morningstar Canada, 2000.
This chart illustrates how difficult it is for investment managers to remain at the top. Here's how it works.
In 1998, we can see that 40 managers out of a total of 165 were in the top quartile of investment managers. The top quartile represents the top 25% performing managers of the year. If we look back to 1997 we can also see that these managers come from the bottom as well as the top performing quartiles. In 1999, it becomes evident that making it into the top quartile doesn't necessarily mean you'll stay there. In fact, almost half of the managers fell below the median manager's performance.
Maintain your poise in the face of market volatility. Accept that the value of your investments will rise and fall in the short term based on market behaviour. But that's okay because what matters is whether or not you reach your goals at the end of the day.
4. COMMITMENT — Ignore short-term market events. Keep your eye on the prize.
History shows that moving in and out of the market may reduce returns, so don't bail out.
Consider a "sticker," a hypothetical investor who invested C$1,000 in the Canadian stock market (ie. the TSE 300 Index) on January 1, 1990, and stuck with it through the end of 1999. At the end of those 10 years, the sticker would have a total of C$2,605. Now consider a "bailer", a hypothetical investor who also invests C$1,000 in the stock market at the same time as the sticker, but tries to time the market periodically. By timing the market he risks not participating in market upswings. Even missing 10 of the best days in the 10 years between 1990 and 1999 meant a substantial reduction in your investment — a 25% reduction to be exact.
Figure 3. Can you guess when the market will be up or down? 
Source: TSE 300 Composite Index, Frank Russell Company
Your investment strategy was selected based on your risk tolerance, age, how long you plan to work, financial circumstances, retirement goals, and attitude about investing. Stay committed to your strategy and don't alter it unless changes in your life or lifestyle prompt it.
5. DISCIPLINE — Don't be ruled by consumption.
We live to spend. Instead of setting money aside, we count on the market to finance our goals. But remember, exceptional investment performance cannot replace a sustained savings effort. Consider the following example. Three hypothetical investors who make C$25,000 per year invest in the TSE 300 on April 1, 1975 until March 31, 2000. Investor A is an average investor but a great saver. Investor B is an aggressive investor but an average saver. Investor C is an average investor and an average saver. After 25 years who do you think builds more wealth? The results? Two of the three investors end up with a six-figure nest egg after 25 years (see Figure 4). But the investor who saved more and continued to invest (Investor A), ends up with a higher account balance than the aggressive investor who earned a higher market return (Investor B). The great saver/average investor accumulates over C$187,000 more than the average saver/aggressive investor. And, the aggressive investor had to accept more risk in order to achieve their high returns, yet still ended up with a smaller balance. Try to discipline yourself to save. Adopt and stick with an old-fashioned savings program that complements your investment strategy.
Figure 4. Discipline is Rewarded 
Source: Frank Russell Company; TSE 300 Composite Index, April 1975 - March 2000
Investor A, saves 8% of their income (C$2,000 per year), but earns the TSE annual average (14.0%) on their savings. Investor B, on the other hand, saves 2% of their income (C$500 per year) and earns an average annual return of 18.0% over the period. Investor C saves C$500 per year, yet earns the TSE 300 annual average (14.0%) on their investments.
Invest for Success
Next time the market nose-dives or you're tempted to act on a "hot tip" from a friend, consider these five principles in your mind. In volatile times, success will come to those who are humble, honest, poised, committed, and disciplined.
* Source: New York Times, June 22, 1999
Article is based on the research report, "Characteristics of Successful Investors" developed by Dr. Ernie Ankrim, Frank Russell Company, 1999.
Dr. Ernie Ankrim is Frank Russell Company's director of portfolio research and a frequent public speaker and writer on investment issues.
Copyright © Russell Investments Canada Limited 2000. All rights reserved. Important Legal Information. Date of first use: April 26, 2000.
This is a publication of Russell Investments Canada Limited. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Russell Investments Canada Limited. Frank Russell Company, a Washington, USA, corporation, operates through subsidiaries worldwide.
|
|
|
|
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Products and services described on these websites are intended for Canadian residents only. Information on these sites should not be considered a solicitation to buy or an offer to sell a security to any person. Persons outside Canada may find more information about products and services available within their jurisdictions by going to Russell's worldwide site, http://www.russell.com.
Legal Information Privacy Policy
Consumer Protection
Required Sales Disclosure
© Russell Investments Canada Limited 2012. All Rights Reserved.
|
