63. Building Your Investment Approach
Building Your Investment Approach
In this episode, I introduce my upcoming series on developing your own investment approach. Much like the weight loss advice of "eat better and exercise", I think we can get a bit more specific on understanding an investment approach beyond "just buy an index fund". I have no problem with index funds whatsoever but this series will dig below the surface to help you understand what investment approach makes sense for you whether you work with an advisor or go with a DIY approach.
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Transcript:
Hello, and welcome back to the Canadian Money Roadmap Podcast. I'm your host, Evan Neufeld.
Today, this is the first episode of 2023, and we are going to introduce the idea of building your own investment approach. There's going to be a multi episode series here, and so this week we are just going to dive into the high level thoughts and the reasons why you should focus on building your own investment approach.
Welcome back to the podcast. I hope everybody had a great new year and a great holiday season. I'm sure many of you have set some fantastic financial goals for this year, among many other goals. If you're willing to share those, I'd love to see those. If you want to email me, my contact info is always in the show notes. I'd love to see what you guys are planning on for this year. But as far as the podcast goes, I always have a lot of different ideas of things that I wanted to do, but to start off the year, I really wanted to focus on doing a lot more education on building your own investment approach. This is something that will likely change over time. As things change, as you change, as you do more research, as you have more opinions, and maybe if you see investing as a bit more of a hobby, then a means to an end, then you might have a completely different approach. And this is something that I've wrestled through myself here and I've kind of developed a few things. But this series of episodes is not going to be an explainer of what I do or what I recommend, but just more of an education on all the different aspects of building an investment philosophy and the importance that there is in having a philosophy when it comes to guiding your investment decisions.
So I think this should be pretty interesting, and there's going to be a number of episodes that I'm going to do. Probably going to be smaller episodes that we can actually dig into things a little bit more, but also give you enough rope that you can actually understand it and take some things away from it. Let's just get into the explainer. So the idea here with building an investment approach or an investment philosophy, style, system, whatever you want to call it, it's just that there's a lot more to it than you probably expect, or that you might have read online. It doesn't have to be overly complex by any means and my goal isn't to overcomplicate, it's to increase education as to help you understand the implications of the decisions that you make. So let me give an explainer with something else in most people's lives and I'll beat the dead horse here. So if you had a goal, again, many of you might have the same goal. This is probably the most common goal around New Year's time. What if you had the goal of losing weight or getting into shape, whatever you want to call that, what should you do? The obvious thing that you should do is eat better and exercise. Great, now what? What does that actually mean? What does eat better mean? Maybe that means eat more vegetables. That's something that we're trying to do in our household, and we've got little ones at home, so trying to introduce more vegetables into our kids' diet is something, but I also know people that are on the keto diet. And keto is a lot of fat and a lot of protein, probably not as much vegetables, and definitely way less in carbs. Are both of those versions of eating better? What about the Mediterranean diet? Things like olive oil, vegetables, whole grains, lean proteins, like, oh, that sounds pretty good, but what about intermittent fasting?
I know people that have done that and they eat like pigs, but only even three or four hours a day, so then it's healthy because you're losing weight. It's like, eh, I don't know. Maybe not. What do you eat when you get sick? If you're listening to this and you haven't been sick this winter, count yourself lucky, but does your diet change and you get sick?
What if you have an allergy or food preference? What if you really like hamburgers? How does that fit into eating better? Can that actually be healthy? Can you have a cheat meal? It's like, okay, okay. The horse has been beaten here, eating better. Yeah, it's great to say you're going to eat better, but what does that actually mean?
What about exercise, is exercising cardio? So everybody should go on a run. What if you got a bad knee? Okay, maybe you should do low impact cardio. Maybe you should do swimming. Maybe you should go on the bike. Are those better? I don't know. What about lifting weights? You should probably lift weights too. There's a lot of research about resistance training and how beneficial that is, but what kind of exercises do you do? How many sets, how many reps, should you focus on compound lifts or a “bro split”, I've heard it called, that focuses on specific muscle groups. How often should you lift? What happens if you get injured?
So to have a goal of losing weight or getting into shape, putting on muscle, whatever it is, you can be more specific with your goal, of course, but say you want to lose weight and the response is, you should just eat better and exercise. It's like, yes, for sure, but what? What does that mean? And for you, could that be different than for somebody else? And could you have similar results if you do it differently? Yeah, you probably could.
And so I hope you're kind of getting the picture here, is that the same is true with investing. If you want to invest, first of all, is it just the goal to invest or do you want to make money to buy something or do you want to retire early, or do you want the option to retire at all someday? You're investing goals are really important first, and that's not the point today, but let's just say you want to invest. Well, lots of places on the internet. Lots of books would just say, just buy an index fund, put 500 bucks a month into an index fund and you'll be fine. It's like, well, maybe you might be okay, but like I agree. Index investing is great and I personally have some money invested in index funds for sure, but there's more to know than that.
Okay, so this series isn't about talking bad about indexing, it's about dogma, which simply is kind of like widely held beliefs that aren't questioned or challenged and dogmatic internet advice or podcast advice or YouTube advice that doesn't really tell the whole story.
The benefit of a podcast is that we have the time to tell the whole story and the problem that I have is that the people that I talk to and in my profession, I actually get to talk to real people and not just live in an internet forum world. The people, the real people that I talk to, they don't know the whole story and they don't know their investment approach, and to them, dogma isn't helpful, so just buy an index fund and you'll be fine, isn't helpful. You know the people that have reached out in the recent months, many of them have listened to this and many of them are coming to me saying, “yeah, but what does that actually mean? And the market's down and I'm panicking”. It's like, okay, well maybe just the dogmatic “just buy the s&p 500” isn't really helpful.
So in the coming weeks anyways, the episodes aren't specifically about indexing, but they'll address some of the support over counterpoints to the typical internet advice. And we're kind of going to get into demystifying the diet and exercise version of investing. People say “just buy an index fund”, it’s like, what is an index fund? Which index? The s&p 500, the TSX. What about the MSCI world? What about infinite other indexes? And, do you really mean an index ETF? Because the internet sure has a problem with mutual funds, but what if an index mutual fund is actually better? Do you know what the differences are? You might not, and if you quote, “just buy an index fund”, do you ever want to make changes to your investment approach? Most portfolios that I get to look at, that have an index fund approach. Actually, lots of other stuff that isn't just an index fund, they're penny stocks. There's all sorts of active things in there, and that's fine, but you have to know what you're doing and what the potential impact could be.
What happens if you get nervous when the market goes down? Are you going to sell everything? Is that better? Is that actually what you want to do? That could be part of your investment philosophy. Do you have the risk tolerance or risk capacity to quote, just buy an index fund? What if there are ways to improve returns instead of just buying an index fund? And what does that look like?
What about diversification? Is an index fund actually diversified? Is your index fund cap weighted or equal weighted? What does that even mean? Does that matter? Does it matter that 30% of the s&p 500 is only the 15 largest companies? What about the other 485? Elsewhere in your life you look for a good deal on stuff. Looking for electronics. You're looking for groceries. You look for a good price. Sometimes the biggest companies are the most expensive relative to their profits. Does that matter? Now, I'm not talking about the expense ratio of an ETF or a mutual fund. I'm talking about the actual price that you're paying for a dollar of profits for the companies within there.
Does that matter? I'm going to say yes. Can you invest with companies that are better deal? Does an index fund let you do that?
It's a lot of questions that I'm going to leave hanging here that I hope you'll come back and listen to a couple of these episodes. And again, I'm not going to poo poo index funds, but in the coming weeks I'm going to have separate deep dive episodes on many of these considerations to help you build your own investment philosophy.
Again, the goal is not to overcomplicate things, but in speaking with many real people, not just spreadsheet millionaires on reddit. Most people have no clue what they're doing and have no clue what they're buying when they're told to just buy an index fund. Don't get me wrong, index investing is a great way to participate in the markets, but just think, just buy an index fund is the exact same as eat better and exercise. The statement is clear here, but the implications in actions are not. So these episodes will help demystify many different aspects of investing that will hopefully give more confidence in your investment plan.
I am hoping this series will be valuable for people who work with an advisor already or use a robo-advisor or are DIY investors. Because perhaps it might give you the information you need to do more research and ask more questions about your own approach. So if you work with an advisor, are they kind of more of an order taker type of advisor that says, okay, what do you want? And yeah, okay, I can find that for you. Or do they have an investment philosophy themselves that they follow? Maybe your philosophy doesn't necessarily line up with. If you use a robo-advisor, you can take a look and see what the underlying holdings are. And once you have your own philosophy, and once we've kind of talked about what all those things are, you might actually understand exactly what the robo-advisors investment philosophy is too. If you're DIY, yes, I know there's a lot of people that say, yeah, I just buy index funds. But deep down, do you actually do that, there are a few other things that you think and feel and your portfolio is going to be a reflection of that. And even if it isn't, maybe you do own just index funds. I hope that the series will give you a lot of tools and information to understand what the implications are of that.
So there's virtually infinite things that we could discuss, but I'll cover off a few high level decisions that you might want to make when it comes to building your own portfolio. The first one was going to be asset allocation. We'll talk about stocks versus bonds. We've done a few episodes on that before, but I think in the context here would be really important.
We'll have a conversation there with risk of course, too, and how that affects your asset allocation. Another one we'll talk about is strategic versus tactical portfolio management. So strategic is typically the idea that you would have a static weighting between say, stocks and bonds or other asset classes, and you rebalance over time.
Whereas tactical says, as the world changes and as the market changes, you're going to shift own a little bit more right now, sell some and own a bit more later, you know, go back and forth a little bit, be a bit more tactical with your approach.
Kind of dovetailing into that tactical approach is active versus passive. This is probably something that you've heard of before. I'm going to talk about a few things there and why passive might not actually be as passive as you think. Um, I'm not opposed to passive by any means. Again, all these considerations are, there's pros and cons to all of them, and so I'm hoping to talk about all of those, but active versus passive, there’s a few different layers of that debate as well, which I'm excited to talk about. Growth versus value, so this is a bit more specifically related to equities or stocks and how one might prefer owning one style or another. Growth is the idea that these are companies that are probably priced a little bit higher, but they're fast growing in terms of say, users, revenues or things like that. Whereas value, I'm going to get into this and there's a hundred different definitions of value, but value is generally based on the idea that it's a lower price for future profits regardless of the growth trajectory of that business.
Another episode that we'll talk about is concentration versus diversification. And they can go hand in hand for sure, but there are some potential challenges that you might run into that you might not have considered there. Concentration being holding fewer holdings and even say within index funds, sometimes you can have really significant concentration between very few stocks, and they might even be in very similar categories that might have really high correlations to each other. So sometimes it's not always as diversified as you might think. And so can you be over diversified? We're going to talk about a lot of things there that'll be interesting.
Then finally, the last one that I am, looking forward to talking about is small caps versus large caps. If you haven't heard those terms before, cap refers to the idea of market capitalization, which just takes a look at how many shares are outstanding for a company multiplied by the share price, and that gives you the total value of that company based on today's pricing. A small company, depending on your definition, is probably somewhere smaller than 10 billion.
Canada and the US would probably have different definitions for small cap and large cap. Large cap would probably be 15 billion plus. There's mid-caps in there. I'm not really going to get into that in that episode, but small cap versus large cap, you might have a preference once you understand what those things mean and what the potential risks and benefits are of each of those segments of the market.
So asset allocation, stocks versus bonds, strategic versus tactical, active versus passive, growth versus value, concentration versus diversification and small cap versus large cap. Those are just a few, but those are the ones that I thought would be interesting enough to talk about on the podcast in subsequent episodes here.
So again, this is not going to be the index versus something else? No. It's just more information for you. If you are a DIY investor, if you work with an advisor, if you work with a robo advisor; most people don't really understand what their investment approach is. And if you're listening to this podcast, you're probably interested in learning more about investing and this is as good of a place to start as I could come up with especially going into the new year here.
So I'm really excited for this upcoming series. I think it's going to be important. If you have any questions specifically going into this series, send me an email and I might be able to get to it before I actually record each episode.
But if you do already have a really well-defined investment philosophy, before we talk about this, boy, I'd love to hear it. And then maybe things will change once we cover off some of these episodes. So if you want to send me an email at hello@evanneufeld.com. Feel free to send me just kind of a general summary of your investment philosophy or what your experience has been.
Anyways, thanks so much for coming back and listening. There's a lot of new listeners here, so I look forward to a lot of fun episodes here in the coming weeks. Thanks so much for listening, and we'll see you in the next episode.
Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner(CFP) and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.