Some investments are more prone to emotion than others. Here’s how to avoid following your heart

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’s Love Got to Do with It, Tina Turner could’ve been singing to an audience of investors. Investing is loaded with emotion. There’s no way around it because markets are volatile and regularly go to extremes.

The problem is, emotion isn’t good for investing. It clouds your judgment, causes you to ignore facts and may prompt you to act without understanding what you’re buying.

I’ve come to recognize the signs of unconditional love. It’s 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’s an air of confidence that makes you feel like you’re missing out.

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’s production growth. These can lead to future profits, but there’s no guarantee.

And don’t forget that love is blind. When investors fall for something, they often don’t know what their return is. They know the yield on a GIC or the return of an ETF, but they can’t tell you how they’ve done investing in their new love.

Some investment categories are more prone to emotion than others.

Dividends

People love their dividends – and for good reason. They provide a steady and growing income and bring fiscal discipline to a company’s management.

But too much love can turn an investor’s decision-making process upside down when their No. 1 (and maybe only) criterion for buying a stock is its yield.

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

If you want a dividend portfolio, set a minimum yield that you’ll accept – say, 3 per cent. Then focus on acquiring a diversified group of companies that are positioned to maintain or increase their dividends and, here’s the clincher, are reasonably priced.

The dividend threshold narrows the list of potential investments but is no excuse for an undiversified portfolio.

Real estate

You’ve heard it said, or perhaps said it yourself, “You can never lose on real estate.” That sounds like love to me.

Where’s the problem? Love-struck investors can be sloppy with the numbers. They’re too optimistic about rents and don’t account for all expenses. A property needs to produce an income. If it doesn’t, it’s simply a bet on higher prices, which requires impeccable timing and a strong housing market.

Let’s say you buy a property for $500,000 and sell it 15 years later for a million. That’s an average annual return of 5 per cent (before real estate commissions and leverage). Without positive rental income (after expenses, depreciation and taxes), that’s 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.

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

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.

Gold and cryptocurrencies

I’m lumping the two together because they’re both priced by investor sentiment. It’s not about far-fetched measures of valuation because there are none. It’s all about love.

When being implored to buy bitcoin, I always ask: What’s it worth? If it’s $200,000 and trades at $100,000, I’m all in, but I never get an answer – just a vague statement about crypto being the future and/or a store of value.

Gold is similar. Gold bugs only have one recommendation. It’s a buy whether it’s trading at $1,000, $2,000 or $3,000.

There’s money to be made in gold and cryptocurrencies, and certainly real estate and dividend stocks, as long as you keep Tina’s words in mind: “What’s love but a second-hand emotion?”