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2017
  12: 04 11
  11: 06 12 20 27
  10: 01 07 16 23 30
  09: 04 11 17 23
  08: 07 16 20 28
  07: 02 09 16 23 30
  06: 04 11 18 26
  05: 07 14 21 28
  04: 02 09 16 23 30
  03: 05 12 19 26
  02: 05 12 19 26
  01: 02 07 15 22 29
2016
  12: 04 11 18 26
  11: 06 13 20 27
  10: 02 09 16 23 29
  09: 04 11 18 25
  08: 07 14 21 28
  07: 03 10 17 24 31
  06: 05 11 19 26
  05: 01 08 15 22
  04: 03 10 17 24
  03: 06 13 20 27
  02: 07 14 21 28
  01: 03 10 17 24 31
2015
  12: 06 13 20 27
  11: 01 08 15 22 29
  10: 04 10 18 25
  09: 05 13 20 27
  08: 17 23 30
  07: 05 12 19 26 31
  06: 06 14 21 28
  05: 03 09 17 23 31
  04: 04 12 19 26
  03: 01 07 15 22 28
  02: 07 14 21
  01: 04 12 18 25 31
2014
  12: 06 14 21 28
  11: 02 08 16 23 30
  10: 04 11 19 26
  09: 06 14 19 28
  08: 10 16 24 29
  07: 05 12 19 25
  06: 08 15 20 29
  05: 04 11 18 25 30
  04: 06 12 20 27
  03: 02 09 16 23 30
  02: 01 09 16 23
  01: 05 12 18 26
2013
  12: 02 09 16 30
  11: 03 11 17 24
  10: 06 14 20 27
  09: 09 16 23 30
  08: 04 10 25
  07: 07 15 21 28
  06: 03 09 16 23 30
  05: 05 12 19 26
  04: 07 14 21 28
  03: 03 11 17 24 31
  02: 04 10 17 24
  01: 06 13 20 27
2012
  12: 02 09 16 23 30
  11: 04 11 18 25
  10: 07 14 21 28
  09: 02 09 16 23 30
  08: 05 12 19 26
  07: 01 08 15 22 29
  06: 03 10 17 24
  05: 07 13 20 27
  04: 01 08 15 22 29
  03: 04 11 18 25
  02: 05 12 19 26
  01: 01 08 15 22 29
2011
  12: 04 11 18 25
  11: 06 13 20 27
  10: 02 09 16 23 30
  09: 04 11 18 25
  08: 07 14 21 28
  07: 03 10 17 24
  06: 05 12 19 26
  05: 01 08 15 22 29
  04: 04 10 17 24
  03: 06 13 20 27
  02: 06 13 20 27
  01: 02 09 16 23 30
2010
  12: 05 12 19 26
  11: 07 14 21 28
  10: 03 10 17 24 31
  09: 05 12 19 26
  08: 01 08 15 22 29
  07: 04 11 16 25
  06: 06 13 20 27
  05: 02 09 16 23 30
  04: 04 11 18 25
  03: 07 14 21 28
  02: 07 14 21 28
  01: 03 10 17 24 31

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2001: Q1 Q2 Q3 Q4

Dan's Reports
About Dan

Privacy Policy


Cash is king among fund investors
Skittish investors continue to hoard cash

Canadian mutual fund investors are scared - or at least unsure where to put their money. While mutual fund sales have remained fairly strong, conservative fund categories have drawn in the bulk of new money. Past research has shown us that recent performance, particularly the past six to twelve months, is what drives Canadians' investment decisions. The question is: are Canadians shooting themselves in the foot by sitting on the sidelines, or are they smart in parking their money in safer havens?

Behavioural trends

The area of behavioural finance is one which has attracted lots of attention as practitioners search for factors explaining why their clients behave the way they do with their investments.

Part of my job is to review some of the larger discount accounts held at Sterling Mutuals Inc. I don't offer specific advice but make suggestions on strategy and ways to consolidate fund holdings. I can't believe some of the portfolios I've reviewed in the past several months for some of our discount clients. Most are very heavy in technology and loaded with just about every new fund launched in the past two years. My typical diagnosis goes something like this, ".fees are on the high side; too much concentration in technology; too many funds; and there appears to be a general lack of strategy". I then finish with some suggestions on how to improve each of these elements thinking I've helped our clients improve their mix. When checking back one, two, or even six month later, I find that nothing's been changed. Behavioural researchers haven't studied this, but it's apparent that sometimes investors only take the advice that they like. Let me give you an example.

Sometimes I speak to clients who really just want justification for a strategy or transaction they're going to implement anyway. Having the support of a qualified professional makes them feel better about their decision. If they don't get the answer from me, they may continue asking others until somebody tells them what they want to hear. Bottom line: they do want they originally wanted to do in the first place. That aside, there are some characteristics that academics have formally recognized in recent years.

Overconfidence

Investing in a manner that displays overconfidence is something that both professionals and amateurs fall victim too time and time again. The tech boom set up many uninformed investors for this one. While 1999 seems so far away, recall that it was a year when any stock issued by a company with ".com" at the end of its name made huge gains in very short time spans. This became so ridiculous that companies with absolutely no operating businesses (i.e. shell companies) began changing their company names to anything that had a technology sound to it and their share prices started moving north. Amateur investors could essentially buy any company with a neat-sounding concept and make a big, quick buck. The silly thing was, it worked like a charm for many months. Some people quit their jobs or declared "day trading" as their new vocation because they were making big money trading tech stocks. Just as many of us knew would happen (though didn't know when), the bubble eventually burst and those same day trading enthusiasts ended up giving back all of their profits, and much more. That is a more extreme example of the dangers of overconfidence, but the point is quite clear.

Rear-view mirror investing

This is perhaps the most frequently cited error made my retail investors. I lead a research project on investor behaviour back in 1998. We looked at how investors performed relative to the funds in which they invested. Overall, we found that investors did underperform the published performance of their funds, due mainly to poor timing. Delving further into this result, we found that the poor timing materialized from investors jumping into funds after they had just posted a very strong year and bailing on funds posting poor negative years.

The fund industry itself is somewhat to blame for this phenomenon. When a fund posts a strong year, it usually pulls up the compound returns that securities law forces fund companies to advertise - one, three, five, and ten year compound annual returns. Armed with attractive returns, a fund company usually pumps advertising dollars behind their "best looking" funds at any one time. Inevitably, the eye-grabbing performance numbers generate investor interest, which usually leads to a rash of new money from investors. This phenomenon may be in the making again.

Top selling fund categories

The past several months have shown that money market funds, and to a lesser extent balanced funds, bond/mortgage funds, and dividend funds have been the hot sellers. Why? Looking at fund categories gives us a clue. The median science and technology fund (the biggest sellers of 1999 and early 2000) has shed more than half of its value during the year ending July 31, 2001. On the contrary, the best performing categories over the past year are those with the strongest net sales currently.

Recommendation

I wouldn't say we're at the start of a bull market but I don't think investors are doing themselves any favour by sitting on the sidelines waiting for performance to pick up before they make a move. Stock indexes all over the world continue to be expensive and profit growth continues to slow (particularly in the wake of the September 11 terrorist attacks and leading up to a U.S. military strike). That's a nasty combination, but I do hold out some hope. I think this will be a stock picker's market. In other words, having a value manager in your portfolio will be more important than ever over the next ten years. If you're truly a long-term investor, building your core around this philosophy while keeping a healthy mix of assets classes (stocks, bonds, and cash) should provide decent performance with enough stability to keep emotional investors from jumping around too much.

Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
 
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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...