Once a Year Re-Balancing Stock Market Investing Strategy

​LIZ'S STORY (Stock Market Investing Case Study 2 of 8)


Liz started investing in the stock market when she was in her 30’s over 25 years ago.  Both she and her husband-to-be had lost money with their homes so they weren’t interested in real estate, but they agreed investing was a priority to secure their future. Early in their marriage, they were concerned about the outcome if one of them lost their job therefore they decided to live on one salary and they saved the other for five years while they were renting an apartment. They thought of buying a summer cottage, but realized that they wouldn’t go there frequently enough to make the expense worth it.  They are both analysts by profession so analysing their situation was second-nature to them.
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While studying for her MBA, Liz learned that investing in equities was the way to go. She also learned that expectations of outperforming the market were unrealistic.  At the beginning, Liz and her husband invested in mutual funds to achieve diversification.  Later on, they invested in exchange-traded funds (ETFs) to save on fees, and in guaranteed investments certificates (GICs) and bonds for security.  But now with interest rates being so low, GICs and bonds are unappealing with the low returns they offer. Liz is now more focused on equities and she safeguards a cash portion in a high interest savings account. 

Worry-free approach

Five years ago, Liz discovered the two-minute portfolio of Canadian stocks published by the Globe and Mail. She likes the worry-free approach the method offers by re-balancing only once per year, in January. And, she is very happy with the results. She adds to her positions throughout the year as it makes sense. She likes the fact that this approach provides calm and safety since it takes away the worrying about the ups and downs.

What she likes least about her once-per-year re-balancing method, though, is that she is not able to take advantage of market swings in her favor when they occur. Sometimes she thinks that if she was watching it more closely perhaps she could do better. But she learned over the years that attempts to time the market usually don’t work out well.  Contributing on a monthly basis solves that problem since some purchases will be made during downturns and others during upturns. For example, she and her husband contribute monthly to the stock purchase plan of her husband’s employer, sometimes they buy low, sometimes they buy high.  Over the long run, it works out.

The ups and downs

As Liz points out, knowing on an intellectual level that there will be ups and downs in the market really doesn’t prepare you for extreme fluctuations.  Liz remembers that they weren’t prepared for the unexpected, extreme downturns of 2000 and 2008 when their portfolio dropped in value between 40-50%. 

It was a challenging time for them as a couple. They had “words”, many words.  In the end, they didn’t sell or panic because they knew, looking back on the market, that historically it had always bounced back. They handled the challenge calmly, they trusted that the market would bounce back, and they slowly bought more equities during the lows and as the market started to climb again. Liz remembers that their portfolio dropped more than the market index during both of these downturns primarily because they were invested too heavily in volatile equities including technology and mining stocks. It was these downturns that prompted Liz to take charge of a larger proportion of their portfolio and make it more diversified.

Liz learned about the importance of saving and the use of the tax-free retirement account for investing by reading books and the business section of the Globe and Mail. Early on, in her 30’s, she was inspired by The Wealthy Barber (David Chilton) and later by The Millionaire Next Door (Thomas J. Stanley). 

Liz believes she was successful at substantially growing her account due to three main attributes:

• She was self-disciplined in consistently saving money and purchasing equities.
  
  
• She always remained interested and continued to learn about the market by reading good information such as reasoned research by Rob Carrick and she stayed away from splashy book titles.
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• She understood early on that it is truly difficult to outperform the market, and therefore she learned to not second-guess her equity purchases. Don’t beat yourself up if it doesn’t work out, she says, take the pressure off yourself.

 
She feels very strongly that the stock market is the way to go, though she cautions emphatically against stock trading.  She believes the stock market is the best vehicle to produce consistent growth and she believes it’s not that hard to learn it. It’s important she says, it will make the difference whether you will retire at age 60 or 65, earlier, or never, whether you’ll be able to go on nice vacations, or replace your car when needed.  She also feels very strongly that you need to learn it yourself (both of you if you are in a couple), don’t blindly trust and hand your money over to a financial advisor, it’s better to manage your money yourself, and if you can’t, at least learn it so you can understand what your financial advisor is doing. Diversify your portfolio, imitate what the pros do and what the big pension fund managers do.

For women, Liz has a special message: don’t let your husband do it all. Get interested, learn about it. She asked her friends and all of them leave the investing up to their husbands. She believes both individuals in the couple need to be on the same page. Her experience with her husband and other men that she knows is that they are much more likely to risk the family money because they are convinced they can beat the market. Yet they don’t.  This is why she doesn’t believe in stock trading. It’s been the source of many arguments in her couple. Thankfully, she and her husband did find a solution that works for them.  Liz controls about 60% of their combined portfolio. Since her husband is the larger wage earner he lends her a substantial portion to invest and she pays him interest on a yearly basis. All things considered, her investment returns have been much better than his, she notes with pride.  ​

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* This case study is based on the March 19, 2015 interview conducted by Y. Gagnon
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