April
8, 2014: Invest in stock markets to secure our retirement against inflation?
GIC was safe, but annual return was very low.
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Stock market: at some point in our life, we'll be investing our money in RRSP,
RESP, TFSA, or regular investment accounts. I have learnt some useful advice
for investment.
1. Be diversified in your portfolio: spread your investment in many industries.
Keep a good allocation of your portfolio in both equities and bond/fixed income
funds.
2. Bond yields and bond prices are moving in reversed directions. If the
interest rate is going up --> bond prices will go down to push bond yields
up matching the interest rates increased.
3. Don't be afraid of recession, short-term market correction, or temporary
issues of a company. During a recession, stock prices are usually at lowest AND
investors/traders dump shares all across the board. During this time, sell your
fixed income funds, and use the proceeds to buy more equity shares. Equity
funds should bounce back significantly when recession is over as compared to
fixed income funds. Rebalance your portfolio accordingly after.
4. Keep the ratio of your fixed income funds and equity funds balance based on
your age by subtracting your age (bond portions) from 100. For example, if
you're 30 years old --> 30% in bonds/fix incomes and 70% in equity.
Re-balance your portfolio regularly, e.g. every six months.
5. Buy an index fund (low cost MER or annual fees) and short-term government
bonds. Most of mutual funds managers could not beat the index fund performance,
e.g. S&P 500 index in US exchange. Vanguard offers "VOO" stock
ticker for tracking the S&P 500 index.
6. You should not play "momentum stocks", which may correct at any
time, i.e. going down significantly.
7. If everyone jumped on the same stock or sector --> stock got over value
quickly --> time to sell or get out.
8. Value investing is a better option. It may go up slower, but down a little
during bad times, i.e. more stable.
9. Don't follow the hype or speculation by traders. According to statistics,
most of day traders are losers.
10. You should only invest a major portion of your portfolio in equities or
stocks if your investment time frame is very long, e.g. 10 years or more.
During recession, stocks may go down 30% in a short time. If you can hold your
equities long enough, it will recover when recession is over. Of course I
assumed you had picked good equities/value funds.
11. Not all ETF funds are the same. For example, some ETF funds track
performance of the whole sector. While other ETF funds track performance of
selective stocks in a sector. US S&P 500 is maintained by S&P -->
they said that if US economy is doing well, then should S&P 500 - and vice
versa. FYI: Canada's TSX index is tracked by other stock tickers, e.g. TSX:XIC
by iShares S&P/TSX Capped Composite Index ETF.
12. Avoid borrowing money to invest in the stock market. You can only
"earn more, but lose big". The interest on the loans is usually high.
You would have to earn more than the loan interest rate --> very stressful.
For example, a loan interest was 4% --> you must get a return of at least
10% - 20% to make the investment a gain of 6% - 16%. However, if you were wrong
--> you'd keep paying the loan interests or lose capital on the loan.
Unfortunately nobody has a crystal ball to predict a stock movement.
13. Read the books/references below and test knowledge of your financial
advisors before letting him/her handled your hard-earned money.
--> I don't give suggestion on which stocks to buy, because the stock market
or a company share price is changing daily/quickly, e.g. today VOO may be
expensive, but next week may become cheap due to market correction OR overall
economic factors OR vice versa.
[Reference books/advice]: One up on Wall Street by Peter Lynch; The Intelligent
Investor by Benjamin Graham. Quotes by Mr. Warren Buffet, who is a famous
investor. “Common Sense on Mutual Funds” by John Bogle [I haven't read this
book, but the author is famous for Vanguard funds]. The complete books on
finance that I found were listed at http://business.financialpost.com/…/the-22-most-important-…/.
--> What would be the best investment? Personally I preferred to invest in
something that I could walk away or spend time on something else interesting,
i.e. don't need to follow up on my investment. Most of "good" or
"reliable" growth funds in Canada produce 10% - 12% annualized
returns for a 10-year period. If our expected return-on-investment (ROI) is
reasonable, we should not be as stressful as fund managers or investment
professionals, who are trying to beat the market index performance.
-> Actually I don't know if the 10-year returns shown in their web sites
already includes the deduction of MER or we have to deduct it from the returns.
--> By the way, my career is not with finance industries. I had to read and
learn to gain back my investment loss due to a financial advisor with horrible
knowledge and funds recommendation. I really don't want to follow stocks'
performance or price movement daily or hourly. Reading their business news to
learn is better for my health.
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Notes: if I invested in Mutual Funds again, I'd look at report on their
performance each year for the last 10 - 15 years. For example, how well they
are doing
- before 2007-2008, when crisis happened: how well funds were performed
- During 2007-2008: how bad their fund plunged
- 2009: how quick their funds recovered
* It is normal to see their funds up 20%-50% in the year 2009.
* If you're familiar with stock market, you can check their top holdings.
* Diversification of their portfolio holdings should prevent crazy dips.
* Annualized returns for a long period of time.
--> Those things should reveal their strategies and competency to handle
your money.
* Good money manager is also an important factor. However, fund management
changes frequently, too. Knowing their fund investment styles and ethic would
be a better bet, because new managers must also follow similar style. It's kind
of hard because some managers perform better than others.
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