Benefits to Investing in What You Know, but Missed Opportunities Too, Say Experts

By Nguyen, Linda | The Canadian Press, September 22, 2016 | Go to article overview

Benefits to Investing in What You Know, but Missed Opportunities Too, Say Experts


Nguyen, Linda, The Canadian Press


Don't invest just in what you know: experts

--

TORONTO - It's something financial planner Mark Coutts sees from time to time.

Clients comes into his Toronto office and tell him they want to invest in a company's stock based solely on its brand-name recognition.

Often, it's an investment strategy he cautions against.

"Just because you own an iPhone doesn't necessarily mean that Apple is the right stock for you. Just because you get a coffee every morning at Tim Hortons doesn't mean that's the right investment for you," said Coutts, an adviser at Sun Life Financial.

"It means you understand the product, but do you understand all the other factors you would normally consider when making any investment decision: the strength of the management, their competitive advantage, the maturity of the industry, the economic factors that impact that sector. Those are all factors you should bake into the equation."

The idea of investing in what you know has been touted by many, including legendary investor Warren Buffett.

The reasoning behind it is that people have a better grasp on what they're investing in if they understand the products or services of the company.

While owning a piece of large, well-known companies may be attractive to many, one of the risks investors can run into is missing out on the potential for faster or bigger growth if they only stick to the tried-and-true brands.

With Apple, for instance, investors may want to buy the company's shares because they see the huge lineups out the door every time it launches a new product.

But getting in on the company now may be expensive, and there may be more growth opportunities if investors looks at smaller firms that may have a connection to Apple, such as its chip maker.

Coutts says buying into big, brand-name stocks also doesn't guarantee perpetuity, such as the cases of Bombardier and the now bankrupt Canadian tech firm Nortel Networks, which both saw their shares plummet. …

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