"Mistakes to avoid when investing in your portfolio and career"
As part of TD’s annual recruitment drive, I visited a number of campuses last year to share some professional advice with MBA students.
I drew parallels between investing successfully in the market and in a career. In my opinion, both are served well if one researches the opportunity; commits to it; accrues its long-term benefits; and ensures the opportunity truly reflects one’s goals and objectives.
Success stories are always inspirational, but not so instructive. That’s why it is worth examining some of the common mistakes made by investors and those embarking upon a professional career. Again, there are a number of striking similarities between the two. In fact, four themes emerged. My remarks take a look at each one of them, and offers some advice on how best to avoid them.
Too much cash
Many investors choose to keep a significant portion of their holdings in cash accounts, essentially remaining on the sidelines. More often than not these investors seek out anemic returns compared to those who own a diversified range of stocks and bonds.
Why hold so much cash? Typically it is for one of two reasons. Investors either think the next big opportunity is just around the corner or, conversely, the next big disaster. Regardless, the net result is the same -- the world passes them by.
It shouldn’t be this way. That’s because the investment world is comprised of a wide range of choices, which can serve the most conservative to most aggressive investor, and everyone in between. It is possible, and in fact, necessary to find the right space to occupy. In short, success comes to those who are engaged.
The same is true for those beginning their career. “Life,” said baseball legend Jackie Robinson “is not a spectator sport.” Or as they say in hockey, it is not enough to go out there and skate. You have to get your stick on the ice.
Not only is it vital to find the right place to work, but also to remain actively involved in it. Success is not just about showing up, it’s “staying vested” in every meeting, conversation, and email. That’s because good people attract good work. So be a magnet for opportunity. Demonstrate commitment. Dedicate yourself to the job at hand.
Too much trading
Being an actively engaged investor does not mean constantly trading stocks and bonds. Indeed, this kind of churn is an investment blunder best avoided. There are two reasons why. First and foremost it is a costly exercise.
One UK study found that frequent traders earned a net annualized return of 11.4 percent over a five year period. Those who left their accounts untouched generated 18.5 percent return. In large part the difference was due to the costs of trading, known as friction costs, that come in the form of commissions and losses on the bid-ask spread.
Constant trading also demands an investor to make two perfect decisions about the market: when to exit and when to return. Herein lies the second problem. Timing the market is a fool’s game. To illustrate this point, consider that 10 days over the past 50 years generated half the returns on U.S. stock markets. Moreover these active trading days were seemingly unexpected or considered anomalies by financial experts.
There are similar challenges for the individual who hops from one job to another. It’s an awfully tempting strategy to climb the corporate ladder, and for some, this approach has proven to work in the short term.
But job hopping has its own friction costs. Most notably, individuals do not gain meaningful experiences if they don’t stay long enough in one position. That includes the invaluable lessons learned in the most difficult of times. Ultimately these lost opportunities catch up to the job hopper, whose value pales in comparison to the individual who has taken a position and held on to it through good and bad times. In investor parlance, it is important to adopt a “buy and hold” strategy to realize the full value of any given job.
Flavour of the month
Most successful investors get rich slowly. Indeed, the ones who try the opposite tact often end up on the losing end. That’s because impatient investors are willing to put money into spaces they don’t understand, nor have the inclination to learn more about.
A lot of people wanted to reduce their retirement date by cashing in on the dot com craze. Many weren’t interested in knowing how any given company was going to generate profits, nor were they interested in the management’s ability to deliver results. Many lost their personal savings, and unfortunately, have postponed their retirements for the foreseeable future.
One heard similar stories about MBA students who, tempted by the get rich schemes of start-up companies, abandoned their programs. After the bubble burst many found themselves further behind those who remained in school.
Individuals must recognize a successful career is a marathon – not a sprint. A serious pursuit is by definition a long-term endeavour. One cannot get sidetracked by the hype and hyperbole of the next big thing. Time and again, flavours of the month only leave people with a bad taste.
At the end of the day, investing is the trade-off between risk and reward. Risky investments provide greater up- and downsides. The opposite is true with safer investments. Every successful investor fully understands their risk tolerance.
However many fail to do so. They have not looked in the proverbial mirror and asked, for example, how they would react if the markets tanked: is it a buyer’s opportunity or a cataclysmic event? Many have not established a long term plan, with an advanced understanding that there will be some bad days and months ahead of them. These investors are likely to wind up with a portfolio that does not match their goals and objectives. Bad fits are a prescription for restless nights and irrational behaviour.
People can also find themselves in unsatisfying and uninspiring work environments. The same kind of result ensues. One can avoid all of this by an honest self-assessment. Ask yourself: what do I want in a career? Where do my passions lie? Will this opportunity bring out the very best in me? Will I bring out the very best in this opportunity?
Few things are more soul-wrenching than a job that has no deeper meaning or purpose. It may be a stepping stone, but it needs to lead you in the right direction, whatever you deem that to be.
University graduates are the fastest growing segment of the labour market. And as such many students will leave school in a position of strength. But finding a job is one thing, building a career is another all together. Learning from these mistakes – and avoiding them yourself – will help you achieve the latter.
I wish you the very best. Thank you.