{"id":56244,"date":"2025-01-29T20:55:15","date_gmt":"2025-01-29T20:55:15","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/investing\/some-investments-are-more-prone-to-emotion-than-others-heres-how-to-avoid-following-your-heart\/"},"modified":"2025-01-29T20:55:15","modified_gmt":"2025-01-29T20:55:15","slug":"some-investments-are-more-prone-to-emotion-than-others-heres-how-to-avoid-following-your-heart","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=56244","title":{"rendered":"Some investments are more prone to emotion than others. Here\u2019s how to avoid following your heart"},"content":{"rendered":"


\n<\/p>\n

\n

\"Love<\/p>\n

This article was first published in the Globe and Mail<\/a> on January 25, 2025. It is being republished with permission.<\/em><\/p>\n

by Tom Bradley<\/p>\n

On her hit What\u2019s Love Got to Do with It<\/em>, Tina Turner could\u2019ve been singing to an audience of investors. Investing is loaded with emotion. There\u2019s no way around it because markets are volatile and regularly go to extremes.<\/p>\n

The problem is, emotion isn\u2019t good for investing. It clouds your judgment, causes you to ignore facts and may prompt you to act without understanding what you\u2019re buying.<\/p>\n

I\u2019ve come to recognize the signs of unconditional love. It\u2019s there when everyone is talking about something, including your cab driver and hairdresser. When the new thing is purported to represent a lasting secular change as opposed to a cyclical bump. And when there\u2019s an air of confidence that makes you feel like you\u2019re missing out.<\/p>\n

The most reliable indicator of love is a valuation based on something other than profits. During the early days of the internet, it was eyeballs. When cannabis caught fire, it was square feet of planting. And when resources such as oil and gold are hot, it\u2019s production growth. These can lead to future profits, but there\u2019s no guarantee.<\/p>\n

And don\u2019t forget that love is blind. When investors fall for something, they often don\u2019t know what their return is. They know the yield on a GIC or the return of an ETF, but they can\u2019t tell you how they\u2019ve done investing in their new love.<\/p>\n

Some investment categories are more prone to emotion than others.<\/p>\n

Dividends<\/h4>\n

People love their dividends \u2013 and for good reason. They provide a steady and growing income and bring fiscal discipline to a company\u2019s management.<\/p>\n

But too much love can turn an investor\u2019s decision-making process upside down when their No. 1 (and maybe only) criterion for buying a stock is its yield.<\/p>\n

Yield is a measure of value for bonds and GICs. The higher the yield, the better the expected return. That\u2019s not the case for stocks, which are valued on the expectation of future profits (which are partially paid out as dividends). An investor\u2019s decision hierarchy needs to reflect this.<\/p>\n

If you want a dividend portfolio, set a minimum yield that you\u2019ll accept \u2013 say, 3 per cent. Then focus on acquiring a diversified group of companies that are positioned to maintain or increase their dividends and, here\u2019s the clincher, are reasonably priced.<\/p>\n

The dividend threshold narrows the list of potential investments but is no excuse for an undiversified portfolio.<\/p>\n

Real estate<\/h4>\n

You\u2019ve heard it said, or perhaps said it yourself, \u201cYou can never lose on real estate.\u201d That sounds like love to me.<\/p>\n

Where\u2019s the problem? Love-struck investors can be sloppy with the numbers. They\u2019re too optimistic about rents and don\u2019t account for all expenses. A property needs to produce an income. If it doesn\u2019t, it\u2019s simply a bet on higher prices, which requires impeccable timing and a strong housing market.<\/p>\n

Let\u2019s say you buy a property for $500,000 and sell it 15 years later for a million. That\u2019s an average annual return of 5 per cent (before real estate commissions and leverage). Without positive rental income (after expenses, depreciation and taxes), that\u2019s not enough return for the risk and trouble. Using a mortgage dials up the appreciation potential but adds to the risk and reduces the income.<\/p>\n

The other place where love for real estate shows up is in asset allocation. Some investors have a net worth pie chart that\u2019s dominated by local real estate. It\u2019s a huge bet on one asset class in one economy, overwhelming the financial assets in their RRSPs and TFSAs.<\/p>\n

Income properties can be an excellent investment. They provide a steady income and are good diversifiers, but to keep the emotion in check you need to pay attention to valuation and size of allocation.<\/p>\n

Gold and cryptocurrencies<\/h4>\n

I\u2019m lumping the two together because they\u2019re both priced by investor sentiment. It\u2019s not about far-fetched measures of valuation because there are none. It\u2019s all about love.<\/p>\n

When being implored to buy bitcoin, I always ask: What\u2019s it worth? If it\u2019s $200,000 and trades at $100,000, I\u2019m all in, but I never get an answer \u2013 just a vague statement about crypto being the future and\/or a store of value.<\/p>\n

Gold is similar. Gold bugs only have one recommendation. It\u2019s a buy whether it\u2019s trading at $1,000, $2,000 or $3,000.<\/p>\n

There\u2019s money to be made in gold and cryptocurrencies, and certainly real estate and dividend stocks, as long as you keep Tina\u2019s words in mind: \u201cWhat\u2019s love but a second-hand emotion?\u201d<\/p>\n

\n

We’re not a bank.<\/h2>\n

Which means we don’t have to communicate like one (phew!). Sign up for our Newsletter and Blog and join the thousands of other Canadians who appreciate the straight goods on investing.<\/p>\n<\/p><\/div>\n

\n<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":"

This article was first published in the Globe and Mail on January 25, 2025. It is being republished with permission. by Tom Bradley On her hit What\u2019s Love Got to Do with It, Tina Turner could\u2019ve been singing to an audience of investors. Investing is loaded with emotion. There\u2019s no way around it because markets […]<\/p>\n","protected":false},"author":1,"featured_media":56245,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[96],"tags":[11395,8562,1484,6765,11237,32103],"dealstore":[],"offerexpiration":[],"class_list":["post-56244","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-avoid","tag-emotion","tag-heart","tag-heres","tag-investments","tag-prone"],"yoast_head":"\nSome investments are more prone to emotion than others. 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