These white papers were co-written by the members of the Final Frontier Group (FFG), an independent study group that includes six successful portfolio managers and financial advisors affiliated with various firms across Canada. Rob McClelland is a member of this group.
The Risks of Concentrating Your Wealth In One Investment
The problem: Many investors concentrate their wealth in a small number of companies – often including the one they work for.
What it means for you: A large holding in a single company offers a possibility of tremendous gains, but a much higher likelihood of catastrophic loss.
The Long Term Risks of Volatility
The problem: A portfolio of individual stocks is far more volatile than the overall market.
What it means for you: Higher volatility leads to lower compounded returns over the long term. Therefore investors who hold individual stocks are taking risk that is unlikely to be rewarded.
The Risks of Concentrated Stock Portfolios
The problem: Individual stocks are more volatile and unpredictable than they were a generation ago.
What it means for you: Investors who follow the old rules—by holding just 10 to 30 stocks, for example—are taking unnecessary risks and are likely to under-perform a properly diversified portfolio.
Structure Trumps (Trading and/or Switching)
The problem: Many investors believe that they need to trade regularly, or hire a professional to trade on their behalf in order to be successful. Be it trading stocks, switching managers, or tactically rearranging portfolio weightings in anticipation of a market event, investors often find themselves using strategies that by and large do not produce the best results.
How this affects investors: “The perception that trading is good for your portfolio and a reliable way to increase returns sets investors focus in the wrong direction. Instead of setting up a structured long-term portfolio, investors focus too much energy on trying to make the next right move. In essence, they are in search of the Holy Grail, and are on a dangerous path towards performance chasing and other bad investment habits.