Five things investors should know but don’t, is a fine headline for an article. Even better the article itself makes the five points cogently.
It appeared in the Financial Post on 4 July 2015. You can see it here.
I found it quite interesting. People would be far better off financially if they paid attention to what Paul Hodson has to say. Read the article. It is well worth the time.
His five points are these:
- Leveraged ETFs are, simply, horrible investments
- Analyst reports are never issued on closed-end funds
- ETFs can close without a unit-holder vote
- Diversification does not need to be overly complicated
- Dividend growth stocks beat everything else
I have paid little attention to closed end funds and ETFs so the first three were interesting but not stay awake at night interesting. If you hold investments like these, you may learn something useful from the article.
The last two are important for everyone. Both point to simplicity as a value as opposed to complexity which seems to be the flavor of the day for most advisors. See ETFs and closed end funds.
Diversification need not be complicated. According to Mr. Hodson, studies show that 15 positions will give you adequate diversification. Owning 100 securities adds complexity but “no incremental return or risk reduction.”
You have costs for no likely gain, so “Diworsification” may be the more appropriate description.
Stocks with growing dividends are his preferred answer. It is difficult to argue with his favourite. There are corporations who have increased their dividend regularly, even yearly, for decades. I had a client once who had such a portfolio and had owned it for a very long time. It had reached the point where the annual taxes on his dividends were three times more than the securities had originally cost.
There is, of course, a serious problem with this form of portfolio. It is incredibly boring. Compound growth and cash income over a long time is like watching Windows update it’s security features. Nice when it is done, but dull in the interim.
If excitement is part of your profit from investing then, as Mr. Hodson points out, leveraged ETFs may be your best choice. Good luck with that.
For most boring is a better choice.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.