With stock indices closing at record highs following U.S. President Donald Trump’s inauguration, investors must remember that economies and businesses are built over lengthy periods of time. Thus, playing close attention daily market activity could result in clients’ making bad long-term decisions, said Steve MacMillan, a portfolio manager with Toronto-based Fidelity Investments Canada ULC at the firm’s Legends of Investing symposium in Toronto on Wednesday.
That’s because just as stock markets can jump, they can also plunge — and investors looking for stable investment returns must be willing to wait out both scenarios, he said. However, fear and impatience are making their marks on today’s investors and their financial advisors, the latter of whom are afraid of losing their clients’ money and looking foolish.
For example, investors today currently hold a stock on the New York Stock Exchange for an average of six months, which is a drastic difference from the average holding period of eight years for an investor in 1956, according to MacMillan. The problem is that the more you shorten that holding period, the more likely your returns will be based on luck and not the economic value of the company in question, he said.
“If you own a stock for a decade, the earnings growth…[will] determine your return,” he explained to the audience of advisors. “You have a great stock over a quarter? Even great companies miss quarters. What about over a week or a month? Returns don’t have anything to do with fundamentals. It has probably more to do with the market setting at the time.”
MacMillan’s own process in choosing securities for his funds is looking for companies he wants to hold indefinitely. These are growing, high-quality businesses with reasonable valuations. Investing in these “stable” and “boring” companies help produce fewer fearful moments, he said.
Advisors should keep in mind that mistakes in investing are not the result of logical thinking backed up by quantitative and qualitative analysis but from a reliance on emotions, MacMillan suggested.
“We don’t have to accept the role that emotions play in our investing because emotions cause us to stray from our logic,” he said. “Straying from our logic causes us to make mistakes and mistakes cost us money.”
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