Losing alpha

“What,” Trevor asked, “can I tell ya? I’m a millennial…”

That was the response when he wrote  me, said he saying he owned one weed stock, plus $8,000 at a roboadvisor in an aggressive-growth fund – and I asked why.

“I’m still young and don’t mind taking risks because of that. I don’t need the cash flow right now, so I figure I can ride out any volatility that comes along. Why wouldn’t I be 90% in high-risk stuff?”

Here’s why.

Everyone’s a cowboy until it all it all hits the fan.  Human nature is as much your enemy when you’re 23 as when 65. It makes you crave inflating assets and shed falling ones. To withstand tumbling markets and asset values, when the media is negative, sentiment bearish and with the blog’s steerage section is moaning like a bloviating speared walrus, you need experience. Living through big crashes in the past – like 1987 or 2008 or 2011 – gives perspective. You learn that over 70% of the time markets go up. That corrections are scary but normal. That bear markets last a couple of years and show up about once a decade. That it always ends.  Always followed by a surge. And that people who sell into a storm are fools while those why buy are usually geniuses.

The odds are – virtually 100% – that novice investors will fold in the first crisis that hits them.

Second, gambling isn’t investing. Buying individual stocks is rolling the dice, especially if you can only afford a few of them, have little diversification and got them because some anon Internet dude told you it was a good idea. Or, worse, your BIL. People make the same mistakes, over and again because they think they know things. Oil and gas guys buy resource stocks. IT guys get tech stocks. It’s just like realtors ‘investing’ in condos. But when your profession runs into trouble, you find risk has doubled.

Third, a B&D portfolio is built more for the world we live in than to reflect the age, gender or risk tolerance of an investor. We all live here. The cost of money is going up. Debt is epidemic. The US president is weird. There’s a trade war raging. Growth and inflation have come back. Real estate’s a trap. Populism and nationalism are spreading. Markets are high. Technology’s changing everything. People are polarizing. Washington got shut down over a fence. In short, it’s not what you’d call ‘normal.’ Investing safely in a world like this, yet still growing your wealth, requires balance and diversification. No matter the age.

Hence the wisdom of a 60/40 split. The safe stuff should be half bonds and half preferreds, using ETFs. If you have a lot of money, ideally this part of the portfolio will include government, corporate, provincial and high-yield bonds. Together with the preferreds (they pay tax-reduced dividends) the yield is currently a tad over 4%. Rain or shine. Moreover, most of the time fixed-income assets like these rise in value when stocks fall (because that’s where worried money flees), so there’s a built-in portfolio shock absorber, keeping volatility and losses down.

On the growth sides are REITs (real estate investment trusts) and ETFs holding equity in Canada, the US and international markets, in roughly equal weightings. Because you never have a clue where things are going, hang on to all asset classes. One year US stocks may shine, but the next may be Canada’s turn. Rebalance once or twice a year, selling off the overweight portion of good assets and using the money to buy the under-performers. Again, this is the opposite to what inexperienced investors do. They never take profits. They buy what goes up. No perspective.

Finally, why would anyone be an aggressive investor? More risk does not always mean more return, especially when most people are emotionally crushed by negative years. When tax shelters like the TFSA exist, just keep in your lane and stay invested. The younger someone starts, the more impressive the result.

In short, tactical investing doesn’t work. Picking stocks is, for most investors, like throwing darts. Advisors who tell you they ‘add alpha’ by being smarter than everyone else are the ultimate con guys and salesmen. Absolutely nobody knows when the next Trump tweet will punch the market or a corporation run rogue.

So, Trevor, get off your horse, lose the chaps and keep it in your pants. Sell the weed, fire the robot and get some balance. And no vaping.