Avoiding the Knockout

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Losing your pocket money in a casino is hard enough, losing your life savings is an even tougher pill to swallow.  So why is it, when it comes to our own investments, we are always trying to hit the big one?  It’s true that a large payout is extremely gratifying, but is it really worth the risk?  If you get knocked out, are you going to stand back up and fight?  Or will the fear of falling again keep you on the sidelines forever.  A great champion will never quit, but learn from their mistake.  So what lesson is there to learn when investing in one thing fails?  Quite easy.  Diversify.

I written many times about the need to diversify.  Diversification isn’t about finding the best investment to put your money into.  In any likelihood diversifying will probably net you some investments that under-perform during any given time-frame.  The need to diversify comes from the fact that you want to mitigate risk.  It’s as simple as that.

Take the example of the ever beloved BlackBerry company.   Canadians once revered this company as the pinnacle of the Canadian technology sector and no one in their mind would have thought that such a large successful company making billions would ever reach the point at which they are today.  5 years ago, no one would have even imagined that BlackBerry would be slashing 1/3 of their employees, losing a billion dollars in 3 months and putting themselves on the auction block for less than the worth of a simple Candy Crush video game.

For Canadians, this story isn’t new.  The story of BlackBerry mirrors almost that of the Nortel days when that technology company was the darling of all communication and network companies.  Many individuals invested in that stock with their life savings.  As the stock went higher and higher, more and more people jumped on board, until the day it went under.  Even to this day, there are those individuals that were burned that never re-entered the investment game because it was “rigged” against their favour.

The stories of Nortel and BlackBerry sends shivers down the spine of many Canadian investors.   No doubt, the pessimistic views of investing can be tied to these two companies because they were mainstream, popular companies that many individuals invested in.  Not only did the media pump them up during their glory days, but their fall have been closely scrutinized by the media as well.  So what lessons can we learn about the failures of investing in these companies?  Does it mean we need to stay away from buying equities forever?

If you have followed my blog, the idea of diversity shouldn’t be new to you.  Despite the mistakes that have been made by the companies mentioned above, the Canadian equities market have continued to grow quite nicely.  The fact is, one company doesn’t define an entire country’s economy.  Nortel and BlackBerry have gone by the wayside, but the demise of both companies have not destroyed the Canadian economy.  Newer companies evolve.  Some successful companies will evolve from the talented people that once occupied the desks of those once great companies.  There will always be better times.

So what does this mean for your own investment strategies?  Stay positive, keep investing and make your portfolio as diversified as possible.

Still not convinced?  One only has to look at the performance of the broader TSX index during a year where BlackBerry has lost over 29% of it’s value.  The S&P TSX index has gained 3.6% year to date.  Despite the fact that BlackBerry has dragged down the Canadian market, other Canadian companies have thrived in our current economy.  If you had to choose between picking one stock or owning roughly 250 of the largest companies in Canada, what would you choose?  Certainly it would be a no brainer.  Why limit yourself to a single company, that you probably know very little about other than the name, when you can participate as an owner for many companies through an index fund.

As an investment, the 3.6% may seem like very little gain, but add in the fact that the cumulative dividend for the S&P TSX index equates to about 2.9% annually and you’d have an annual gain of close to 5.5%.  5.5% is not a bad annual investment yield for being “average” in the stock marketplace.  Your “average” gain on the stock market far exceeds those individuals that have GIC holdings or receiving interest payments on their bank savings account.   Add the fact that dividend yields provide tax credits and capital gains are only taxed at half the tax rate and you are far exceeding the average Canadian investor.  A stunning fact that most people don’t know is that the majority of funds run by professional money managers won’t even match this “average” return from the index.  Seriously, how does “average” look to you now?

As for the individual investors who poured their life savings into BlackBerry hoping for a Cinderella turnaround story?  Let’s just hope they haven’t lost faith in investing, learn from their mistakes of trying to pick just one stock and start diversifying their portfolio.

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