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Despite all the hype around robo-advisors that use technology to manage money online, veteran wealth manager Norman Levine prefers to keep it old school when it comes to investing.
In fact, the managing director at Toronto-based Portfolio Management Corp. — an independent investment firm that works exclusively with high net worth clients — figures the pendulum will eventually swing back to more traditional active investing, which has been Levine’s bread and butter for the last 40 years.
It involves picking a basket of solid stocks with the goal of outperforming an investment benchmark index like the stock market. It’s the polar opposite of going “robo” — which is a so-called passive investing strategy in which your money is invested in thousands of companies through low-cost index funds and Exchange-Traded Funds (ETFs) that track different sectors of the global economy.
“Investors should not pay attention to indexes. Matching an index and beating an index is not and should not be an investment goal because it bears no relationship to your risk tolerance and your needs at all,” says Levine.
“Some of them do really poorly. The worst major index is actually the TSX because it is dominated by resource and financial (stocks) and totally undiversified. And even the S&P 500, which is in theory 500 stocks — because of the way the indexes are done, the better a stock gets, the bigger the importance it gets in the index. So it’s a momentum fund,” he explains.
He points back to 2000, when there were five tech stocks that accounted for almost 100 per cent of the move of the S&P index — which made it very high risk, he says, as proven by the dotcom bubble bursting that same year.
“Investors should instead decide what their goal is, their risk tolerance and not worry about what any particular index does. Over time, broadly diversified portfolios produce the best returns,” says Levine, who recommends owning 20 solid global equities in your portfolio along with other investments.
He suggests looking further afield now to international company stocks for better returns, particularly in Europe, Asia and the Far East.
“The huge mistake Canadian investors make is that most of them only invest in Canadian stocks, but the Canadian market is one of the least diversified in the world, and it’s only 3 per cent of the capital markets of the world. It’s very narrow. There are whole industries you can’t invest in in Canada,” he notes.
He points out that many index funds and ETFs did well in the bull market run after the 2008 financial collapse, but the real test will be what happens to those funds when markets go sideways, or south.
“Last year, we had a big rocket in resource stocks and financials, and that’s all we’ve got. Is that going to be repeated again this year? Chances are, somsething else is going to do better this year, and there ain’t much else in Canada,” says Levine.
Which brings him to what he says is his biggest tip: Don’t invest based on the past performance of any investment, whether it’s a stock, bond, ETF, mutual fund or real estate.
“Look beyond the recent past. Look at the past, when markets haven’t behaved the way they have here.
“We’re now coming up to seven years in a bull market in the U.S. Who knows if it’s going to continue or not. There’s been decades at a time when markets have gone sideways. And if you’re in an index ETF, you don’t make any money. Whereas active managers who have lagged in this up market are not always fully invested and they’re not momentum investors, which is what ETFs are,” he explains.
“So there’s a big urge for people to buy ETFs. I’m saying be wary of that right now.”
He said full-service money managers trade the volatility and can take advantage when stocks slide. But of course fees are much higher than the robo-advisors since wealth management firms like his provide a broad range of services including investment advice, accounting and tax services, retirement planning and legal or estate planning.