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5 Most Common Questions

Investors are a questioning bunch. Need proof? We at 5i Research have answered more than 9,000 investor questions. Quite a few, of course, are along the same lines so here are the five most common inquiries we have had from individuals worried about their portfolios over the past 18 months.

When are REITs going to stop declining?

This has been our No. 1 question recently. The REIT sector outperformed for years, and then — Bam! — big declines. Investors are not used to seeing 20% drops in a so-called safe sector.

This is a tough one to call. If you know exactly what interest rates are going to do, then you can answer this question. We know most REITs are fine on an operational basis since they have decent cash flows and high occupancy rates. We are not expecting many REITs to reduce distributions and, at some point, REITs offering 8% yields will attract investor interest.

We do not think rates are going to rise sharply. The best strategy for investors is to consider REITs as just a small part of their income portfolio. Forget the capital gains for a while, and enjoy the income, especially on those bad market days in other sectors.

Why is my stock down 2%, or 3% today?

This is another question that we simply can’t answer most of the time. If there is no news, no block trading, no insider trading and nothing wrong with the economic or market backdrop, then the answer is: Because it is.

Sometimes stocks go down. Sometimes good stocks go down. It is just the market, and we really would not be concerned about a sub-5% price move in the absence of any other news.

What is the preferred number of stocks in a portfolio?

Numerous academic studies have shown that any additional diversification benefits start to diminish once you add the 16th security to the mix. However, our answer to these queries is usually 20 to 25 securities, as many investors cannot handle the emotions that go with portfolio positions of 6% each. We have seen some portfolios hold upwards of 200 securities, but we really don’t think that’s a good idea either.

Should I take profits on this stock that is up?

This is always the hardest question. Everyone likes to feel good and make money. We try to always turn this one around though, and try to find out whyothers are buying when you are longing to sell.

Most investors should sell their loser stocks rather than their winning ones — trim the weeds, water the flowers, as the saying goes. If your winning position is a giant part of your portfolio (see the point above) then the temptation to sell can be overwhelming.

Should I go to cash because September is the worst month for equities?

In a word: no. Sure, September has historically been the worst month for stocks, with the difference meaningful in a statistical sense. Average losses in the month are more than 1%.

But let’s suppose you want to go to cash in a taxable account. First, you have to offset trading costs: both the costs of selling all your shares and the costs of buying them back. Costs are low these days, but are still more than zero. Then, account for the bid-ask spread two times, once on the sell and once on the re-buy. Now pay capital gains taxes, up to 23% at the top tax bracket.

If you can’t recover all of these costs from your quick trading strategy, you are only going to lose money by going to cash. It can take years or decades to make back what you thought you had saved by avoiding a 1% loss.

Your losses (or missed gains), of course, will be much more if the market actually goes up in September, as the TSX did last year by 3%.

Keep in mind the next time you are questioning your portfolio that the stock market is part science, part art, part experience, and part educated guess, even for the "experts" in the industry. Experience can help, but no one has all the answers.

Peter Hodson, CFA, is CEO of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).

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