Investing Like Your Grandmother (or Grandfather). The Results May Surprise You

When I was a young accountant and happened upon an estate return, I was often amazed at how much wealth the grandmother had accumulated at death. This applied to grandfathers too, but women tend to live longer, so I noticed the tendency more with grandmothers. The accumulated wealth was typically in conservative marketable securities bought over many years.


What I found remarkable, as I saw this time and time again, was that blue-chip stocks dominated these portfolios. (Mutual funds were just coming into vogue and no one had heard of an exchange traded fund (ETF).) Each portfolio had the big Canadian banks, insurance companies, utility companies and the Bell Canadas, Canadian Tires and Thomsons of the Canadian stock universe, plus some large high-quality U.S. stocks sprinkled in. Being a naïve and arrogant young investor, I somewhat derisively at the time called these stock holdings “grandmother portfolios.”

As I look back, an older me should have given my younger self a good swat upside the head, as these portfolios hit on most of the critical tips investment managers and experts still suggest today (other than maybe a little more global diversification and possibly some alternative investments):

• They were fairly well diversified.
• They very rarely turned over.
• They contained stocks that generally paid dividends that grew over time.

Shredding my old tax returns – an eye-opening experience

So why am I talking about grandmother portfolios? Well, a couple months ago I followed my own advice and shredded some of my older personal tax returns. While shredding the returns, I entertained myself by looking at the income earned each year and the capital gains (Schedule 3), which detailed my stock dispositions for each year.

I have always liked to have some risk in my portfolio, and over the years have taken some shots with disruptive technology stocks, “find that big gold mine” stocks and “let’s hit the gusher” oil stocks, among other rather poor stock selections. However, I was astounded when I looked at how many of these flyers resulted in capital losses on my old returns.

The technology stocks included such household names as:

• Samsys Technologies (RFID readers)
• International Verifact (forerunners of point-of-sale payment terminals)
• GenSci Regeneratrion (bone repair and generation for dental use)
• Zeox Inc. (using Zeolite for environmental waste)

Some of the crazy gold picks included such sterling names as:

• International Pursuit
• Gerle Gold (actually looking for diamonds in the Northwest Territories)
• South Pacific Resources (a stock that followed in the draft of Bre-X when it was going up)

And the oil stocks included:

• Dome Petroleum (a famous oil stock for those of you of my vintage)
• Mart Resources (a Nigerian oil play)

The above names are meaningless, but entertaining to me and maybe a couple readers. But what shocked me about my shredding exercise was how many flyers I had actually gone for over the years. (I actually hit on a couple others, but that was luck and not relevant to this post.)

My point is, I was shocked at the time and effort — let alone the money — I wasted trying to chase down the next big thing. 

Moral of the Story

While I have slanted this post on purpose to make a point (I typically also had a substantial part of my portfolio in quality stocks and alike), in retrospect I would have had a larger nest egg if I had stayed away from the above speculative flyers and only bought higher grade stocks.

As an accountant I cannot tell you what stocks and bonds to purchase. But after my shredding exercise, I would suggest the following general investing principles be considered:

1. Buy high-quality stocks, ETFs or mutual funds.

2. Keep the turnover of these securities to a minimum.

3. Diversify across countries and sectors.

4. Consider stocks that pay dividends that grow over time.

5. Keep your flyers to a minimum — or better yet, don’t take any flyers.

In conclusion, invest like your grandmother.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

5 Lessons Investors Can Learn from the Raptors' Championship Run

The Toronto Raptors are the toast of the town and the talk of the National Basketball Association. Fresh off a championship run that surprised some pundits, they now have basketball higher-ups wondering how to replicate their success.

For The Blunt Bean Counter, I’m more interested in the lessons investors can glean from the Raptors’ success – especially tips around the psychology of investing. Both sports and investing mix hard analysis with emotion. We all know the role emotions play in sports. Less known are the psychological challenges of high-stakes investing. Researchers call them behavioural biases.

As Canadians continue to bask in the glow of Raptor success, here are five lessons investors can learn from this historic championship run. 

#1: Herd mentality

The Raptors won a championship by going their own way. President Masai Ujiri set the tone with his bold acquisition of Kawhi Leonard – who was recovering from injury and had played only nine games the previous season with the San Antonio Spurs. Coach Nick Nurse adapted the maverick approach to the hardcourt, where he innovated on both offence and defence to help the Raptors win their first championship.

What investors can learn

Following the herd can be tempting as an investment strategy — popular stocks and funds often look like successful stocks and funds. In reality, smart investors take note of the investment climate but also stop to question the hysteria of the markets. Staying true to your investment policy and principles is important not only for picking stocks, mutual funds and exchange-traded funds, but also for timing decisions to buy and sell.

Avoiding the herd doesn’t need to push investors to the extremes of contrarian investing – but it does require independence and well-defined goals.

#2: Overconfidence

All athletes need to master that balance of confidence and overconfidence – avoiding the pull of “too high or too low.” The Raptors made a mantra of the practice, by preaching the benefits of “staying in the moment.” Because when playing top-flight teams like the Golden State Warriors and Milwaukee Bucks, an overactive ego can prove as damaging as a faulty jump shot.

What investors can learn

What goes for athletes is also true for investors. So many investors think that a few smart investing moves will translate into long-term investing genius. In this way, overconfidence ties into self-attribution bias, when investors believe their success can be attributed only to their investing acumen. If only investing were that straightforward. Even legendary investor Warren Buffett has made mistakes while wrestling with the limits of human intelligence and the inevitable factors beyond his control.

#3: Diversification

The Raptors present an interesting case of a superstar paired with balanced team. While Kawhi Leonard proved pivotal to the team’s success, several Raptors contributed double-digit scoring. This led commentators to describe the Raptors as one of the more balanced championship teams in recent memory. The Raptors’ tendency towards balance only grew as the postseason progressed, and helped the team compensate for a Kawhi limited by injuries and opponents’ double-teaming defences.

What investors can learn

It may constitute almost the first rule of investing, but we tend to forget it: diversify your holdings. Much as basketball teams can’t rely on scoring from one or two sources, investors can’t depend on big gains from a small number of similar investments. Portfolio risk needs to be spread among a variety of investment vehicles and various sectors.

Some investors fail to diversify due to familiarity bias. The theory goes that people trust – and select investments based on - what they know best. They will therefore focus on domestic stocks and funds or those stocks and funds that are household names. By investing in international stocks, adding holdings in several sectors and including both low- and high-risk investments, investors put themselves in a better position. A word of caution: when exploring less familiar investments, seek out dependable research and advisors.

Familiarity bias can also be viewed as a home vs. international bias from an investing perspective.

As I am writing this, Kawhi has not yet decided whether to stay with the Raptors or return home to play for the Los Angeles Clippers, the other rumoured option. He is weighing many factors, but his choice pits Los Angeles, where he was born and raised and has family and friends, against Toronto, an international destination that is somewhat familiar but is still a foreign location and certainly not home. If Kawhi looked at this from an investment perspective, clearly he should sign with Toronto. (And now I’m showing my own bias – for the Raptors.)

#4: Worry

It’s not just sports fans who experience anxiety as they live and die with their teams’ fortunes. Even professional athletes have been known to lose sleep due to worry, as former Raptor Jonas Valanciunas has acknowledged. When tired athletes bring the previous night’s restlessness to the court, their performance generally suffers. Raptors management recognizes this, and educates the players on how to use rest to prepare their bodies and minds for competition. This year’s edition of the Raptors was also helped by a coach, in Nick Nurse, who cultivated a calming culture.

What investors can learn

Losing sleep may not directly influence investing performance in the same way as it drives on-the-court results. But researchers have uncovered interesting ties between worry and investing. Victor Ricciardi, who studies the psychology of investing, found that increased worry about a stock decreases an investor’s risk tolerance for that stock and the chances they will buy it. People may want to control their worries – but we all struggle to master our emotions around investing. For some this can lead to sleepless nights, which can certainly impact us at the office and at home. Part of investing is matching our risk tolerance to our rest tolerance.

#5: Anchoring

Raptors’ fans may not know the anchoring bias by name, but they know it all the same. Years of seeing good teams bowing out in the playoffs – sometimes in embarrassing fashion – conditioned fans to expect defeat for the team. Their beliefs about the future were “anchored” in past Raptors performances. So much so, in fact, that one American sportswriter asked Raptors players about Torontonians’ so-called defeatism. Acquiring Kawhi Leonard helped shift fans’ perceptions, but many still found it difficult to believe this year would be different. Now a championship has given Raptors’ fans an entirely new, and positive, anchoring event to form their expectations in the future.

What investors can learn

Anchoring bias can unsettle our portfolios in surprising ways. The classic investing example concerns purchase price: investors hold on to a stock because they remember their purchase price, not the stock’s decrease in value. They use that original price as an anchor. On the other end of the spectrum, investors may exhibit an extremely low tolerance of risk based on past performance. Think of a new investor who lived through the record one-day TSX drop in 2008 and runs from the markets as a result. Even the investing styles of our parents can anchor our perceptions of the correct way to invest.

Anchoring, like all investing biases, is difficult to avoid. Even our best attempts at fully rational investing behaviour can’t rid us of the emotions that make us human. What we can do is know our personal biases, understand why they may exist and access the best research and professional advice possible so that facts and data inform our investing decisions. And be sure to ask questions; even advisors have their investing biases. Professional advisors should be able to explain their investing recommendations to you.

I hope you found this post fun and informative. As this is the last original post until September (I will post The Best of The Blunt Bean Counter a couple times a month in July and August), I wish you a great and safe summer.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Duplication of Investments

In August of 2011, I wrote a blog post about common investment errors I had observed in my capacity as an accountant who works in the wealth maximization and wealth advisory area. One of these errors was the duplication of investments. I find that many people have this issue to some extent; it is just a question of quantum. Today I want to briefly expand on this topic.

The duplication or triplication of investments, which can sometimes be intertwined with diworsification, occurs when investors own the same or similar stocks, mutual funds or Exchange Traded Funds (“ETFs”) in multiple places.

A simple example is Bell Canada. You may own Bell in your own “play portfolio,” in a mutual fund you own, in your investment advisors private managed fund or indirectly in an ETF fund. The same duplication often also occurs with many of the Canadian banks and larger cap Canadian stocks, such as TransCanada, Thomson Reuters, Enbridge, etc. Unless you are diligent, or your advisor monitors this duplication or triplication, you may have increased your risk/return trade-off by over-weighting in one or several stocks. Some may argue this is really just a redundancy issue, that likely results in higher costs and is not really that significant a risk to your portfolio. Although, I would suggest that if the redundancy is in a more volatile group such as the resource sector, the portfolio risk could be significant.

The investing reality in Canada is that there are only so many stocks in the Canadian stock universe that investment managers can select. This limitation plays a large part in this issue. Duplication can also result within a family unit. If your spouse or partner invests separately, they may be creating redundancies and additional costs, whereas if you invested as a family unit much of this duplication could be eliminated.

Asset Allocation

I think most of us are aware of the concept of asset allocation, which is essentially allocating/diversifying an investment portfolio across major asset classes (stocks, fixed income, foreign stocks, small caps, REITs, etc.). Typically, an effective asset allocation will also consider diversification across countries, which is important given Canada’s limited stock access as discussed above. Your asset allocation should be undertaken in context of your Investment Policy Statement which accounts for your risk tolerance, objectives and trading restraints (such as no stocks that sell arms or tobacco).

When you allocate and diversify your investments, you can typically, to some extent, minimize market risk and volatility. Where you have duplication, you are at cross-purposes with your asset allocation strategy, since you have doubled or tripled up on an asset class. Your goal is diversification with minimal investment duplication.

Tax Efficiency

When I meet or talk with investment managers (the better ones do this on their own volition) on my client’s behalf, I always ensure they have reviewed the tax efficiency of my client’s portfolio. This would include considering the type of income earned, typically interest, dividends, capital gains and would also likely account for their return of capital investments like REITs. This discussion is then tied back to whether an account is a registered account such as an RRSP, a tax-free account like a TFSA or a taxable non-registered account. I wrote about this in these blog posts on tax efficient investing, Part 1 and Part 2.

Where there is duplication, this tax-efficiency can be lost, especially where there are multiple advisors and there is no overall communication. This can be especially costly when tax-loss selling is undertaken in the fall and your advisors are at cross-purposes or thinking they are doing good by selling stocks underwater. You may end up with an excess of capital losses or not enough capital losses, and they all sell the same stock to trigger a loss, even if it is a good long-term investment.

Some Considerations to Avoid Duplication

If you use several investment managers, consider having one oversee the group to ensure each manager is investing in what they know best and there is minimal duplication and proper asset allocation. If you have significant wealth, you may want to or hire an independent person to quarterback the process such as your accountant or a fee for service financial planner.

You may also want to consider consolidating your investment assets. This can be done by reducing the number of investment managers you use (if you have several) or if you manage your own money, review the details of the funds and stocks you own and see if there is duplication of investments or a way to reduce your overall costs.

At the end of the day, your goal is to simplify the tracking of your investments, ensure you have managed your risk and have diversified your portfolio to minimize duplication.

The above in not intended to provide investment advice. Please speak to your investment advisor. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.