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Investing

Brighter life
May 21, 2014

Four reasons I don't buy stocks

There are plenty of equities in the funds I hold. But like a lot of amateur investors, I don't buy stocks directly.

Last week's MoneySense event, celebrating the excellent magazine's 15th anniversary, featured an impressive panel of experts discussing investments. Preet Banerjee, a MoneySense columnist and author of Stop Over-Thinking Your Money had the best line of the night: "I have no idea what the stock market is doing," he said. "And I don't care."

I'm with Banerjee. I don't buy stocks in individual companies and I'm far too busy with my day job – not to mention the responsibilities of being a dad to two kids under 10 — to worry about the stock market. This is not to say that I don't own equities; obviously they're an essential part of a balanced portfolio. In fact, because I have a relatively healthy appetite for risk (and because I plan to work, save and invest beyond my 65th birthday), it's safe to say I have a larger portion of my portfolio invested in company shares than most people my age.

Four reasons I only hold equities inside mutual funds:

1. I'm not a professional investor.

I can calculate a price-to-earnings ratio with the help of my old Canadian Securities Course textbook. But I'd be hard pressed to come close to an informed conclusion about whether a company's share price is over- or undervalued. I know enough about stock investing to know that I don't know enough.

2. I don't follow the stock market closely.

See above. I have neither the time nor energy to stay current on the myriad complexities behind equities trends. It's hard enough to find the time to help my daughter with her math homework.

3. I understand the importance of a balanced portfolio.

I hold a mix of funds that include stocks and bonds from around the world. My equity holdings include large, mid-sized and small companies in a variety of industries. I count on the professional money managers who run the funds I’ve chosen to pick a mix of stocks that are aligned with my investment plan and risk tolerance. Buying a stock outside that portfolio throws everything out of whack. Say I bought a Canadian technology start-up. That has the potential to leave me overweight Canada, technology and even small-cap equities. The more the share price goes up, the more I’m overweight relative to the rest of my portfolio. It’s a mistake that millions of investors make.

4. The recovery remains soft.

My view on buying individual stocks applies in any economy. But it applies particularly to environments like the one we are in now. Consumers and businesses are still hesitant to spend. And the consensus view is that we are in the midst of an extended period of slow economic growth. This is a tough market to pick winners in. It's not that I've never rolled the dice on a stock. In fact, I've done it twice in my life.

The first was a small dot-com stock I got a tip on in 1999. It went down in spectacular fashion (such were the times) with an investor note promising the firm was transforming itself into an incubator. Think Aviato in Silicon Valley.

The second was even more cringe-worthy. I was one of the smart guys that bought Nortel Networks on the way down, after its share price began to fall in 2000.

I lost $1,000 on each of those bets; which is exactly what they were. I'd done no analysis of the share prices, and I had no information on what lay ahead for either company.

Some good did come from the experiences, of course. For just $2,000, I learned an important lesson about myself and investing. Small price to pay.

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