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Seven Steps to Building an Evidence Based Investment Strategy

Seven Steps to Building an Evidence Based Investment Strategy

April 15, 2020

Use what is known about investing to your benefit, writes Peter Watson

Evidence-based investing uses research and what is known about investing to the benefit of individual investors. The evidence applies to solid investment principals and human behaviour that greatly impacts individuals decision-making ability. 

This column will provide seven solid principles of how to best manage investments during this period of extreme stock market volatility.

One. Human behaviour during uncertain times can be your worst enemy. During times of uncertainty and stress, human characteristics often result in poor decision-making.

Understanding the normal internal struggle between doing what you know to be right and what emotionally feels comfortable, is a starting point to making good decisions. 

Two. If you have a financial advisor, maintain open lines of communication. Listen to the advice that is given and use that person as a sounding board for your own thoughts.

Many people find talking to someone allows their thought process to evolve, and as a result have a better understanding of the best decisions to make.

Three. Your thinking will be clearer if you understand that you will be ok or if action has to be taken to improve your financial situation. This is best done with a cash flow projection.

Consider both short-term and long-term expenses. These include current living costs, assisting your children with post-secondary education and planning for your own financially secure retirement.

Then project where cash to pay for these expenses comes from. For example, current income, educational savings plans, employer retirement pensions, government entitlements, and finally investments.

Four. Stay invested. For hundreds of years stock markets have been volatile and that is normal and expected. 

In every single past stock market crash the market has fully recovered and gone on to reach new highs. That too is normal.

Five. Be properly diversified. Stock markets recover but sometimes individual companies do not. Some companies go out of business.

If you have concentrated positions in just a few investments, then the laws of “buy and hold” investing do not apply. Diversification is your friend. That is how you pro-actively manage normal investment risk. 

Six. Rebalance your portfolio back to your target asset allocation. For example, your investing approach could have been 60% stocks and 40% bonds.

If your stock portfolio has decreased significantly. Sell some bonds and buy some stocks to rebalance your portfolio to 60/40. 

The objective when you rebalance is to maintain the same risk profile of stocks and bonds. It is not a prediction of how stocks will perform in the future. 

Seven. Tax planning is always a significant part of investing. It is very likely you want some professional assistance when dealing with these issues.

This could involve tax loss selling, asset location which is the practice of arranging your investments to be most beneficial from a tax perspective and making use of tax-sheltered investments like a Registered Retirement Savings Account and Tax-Free Savings Account.

These are difficult times. Difficult times require making difficult decisions.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.