Investment Philosophy For RDSP
This Wednesday, I was invited delightfully to the Mackenzie Investments Symposium day. This professional event was hosted in their office building in downtown Toronto, and the purpose was to develop a deeper understanding about the different investment processes of their fund management teams. Since many of my clients are using the Mackenzie’s investments in growing their Registered Disability Savings Plan, I definitely would not miss this opportunity.
During that day, there were a number of well experienced fund managers that shared their strategies in managing the investments. Although their focus could be different among one another, (for example, one could be focusing in the Canadian market, while another would be in US), their tactics had some common ground which also aligned with my own investment philosophy. Below are a few lessons that I got out from the day.
Not Relying On Just A Single Company:
There is a saying “never put all your eggs into one basket“. Regardless of how great a company is doing today, there are many unpredictable external factors that could affect their future earnings. If a person invested in only one stock, but that company went bankrupt, one could lose all the retirement savings. The more secure way to invest over the long-term would be to build a well diversified portfolio, where it would invest into different industries, countries or even asset mix. This way, even when a company goes south, it would have a much less significant impact to the overall portfolio.
You may think this is contradicting to the above, but actually it is not. A fund can be well diversified into different sectors, but that does not necessarily mean it needs to invest into hundreds of companies. I personally prefer funds that invest into 30 to 50 stocks, 100 would be the maximum. The reason is I require the fund management teams to really understand the companies that they are investing. If they were investing into hundreds of stocks, it would be doubtful how much do they really know about the individual companies.
In order for a company to continuously in making good profit, it must have its own advantages over its competitors. For example, it could be the knowledge and skills they have in servicing a particular market niche, a technology or infrastructure that only their company has, or the deep understanding and relationship they have with their clients.
During the event, several fund managers expressed that they will not invest into a company simply because it is currently the most hot idea. If we were looking for stable long-term performance, then obviously we should invest into companies that could generate good profits regardless of different market cycles.
Even when a stock goes up, it does not automatically make it a good company. There are way too many factors that could influence a stock price to go up. For example, many investors blindly follow the crowd and rush in to buy the stock. A well experienced fund manager would examine carefully at the different fundamentals metrics of the companies. For instance, how much cash could a company generate in an ongoing basis? How well are the management of the company? Are they reinvesting the companies’ earning wisely to improve their products and services? or is the company carrying a lot of debts just to pay the managements for a good bonus?
Focus On The Invested company, Not The News
We are living in a world that is bombarded with different financial news everyday. It is very easy to lose track of your focus. A sophisticated fund manager would stay disciplined with their investing process, and focus on the information that is relevant to their investment decision. Here are several key questions that they would commonly ask:
– Will this company continue to generate good profit in the long run?
– Is this a reasonable price to pay for it?
RDSP tends to be for long-term investments, in many cases, the investment duration could be over 10, 20 or even 30 years. Although I do see the number of investment choices for the RDSP account have been expanding throughout the past few years, I would be interested in seeing more alternative choices in the future.
- This is for education and general understanding only, do not intend to provide specific financial advice. Please consult with a financial professional before making any financial decision.