Investing your money is a major departure from simply keeping it in a checking account or on deposit for a few months to eke out a slightly higher interest rate. This is separate money that you’ve set aside for the medium to long-term. As such, it’s important to find a balance of risk versus reward with your investments to protect them, not just grow them.
Here are 6 strategies for profitable online investment.
- 1. Pay Attention to Trading Costs
- 2. Learn About Different Trading Strategies First
- 3. Know Your Risk Tolerance to Keep Your Gains
- 4. Buy and Hold at All Costs or Not?
- 5. REITs and Other Income Investments
- 6. Adjust the Investment Portfolio Nearer to Retirement
- In Conclusion
1. Pay Attention to Trading Costs
It’s been found that most active traders make a smaller return compared to the market. This is typical because they trade on stock tips, trade too often, and don’t pay attention to expenses.
In terms of costs, you want to use one of the best trading platforms Canada has to offer. It’s important to consider how much is required to open the brokerage account and whether there are any fees to do so? Also, how much does each stock, ETF, ETN, or mutual fund cost to purchase?
When not paying attention, it’s easy to buy shares in thirty different companies and end up with hundreds of dollars in transaction costs. This eats into what you can invest at the start and the eventual total return from your invested capital too.
One of the best trading platforms Canada has is Wealth Simple. They are mobile-only (no desktop version, sorry) and do not charge transaction costs. So, there are considerable cost savings when using their service compared to some of their competitors. Now you can trade from anywhere.
2. Learn About Different Trading Strategies First
If you open an account and go off half-cocked, you going to end up with a mishmash of an investment strategy. Typically, this looks like a couple of ETFs, some high-priced mutual funds with stunning 3-month trailing returns, and a smattering of individual stock picks that you read about.
The trouble with this is that there’s no strategy here at all. It’s kind of random and the results often reflect this lack of focus. Also, because there’s no real plan here, positions will likely be abandoned at the first sign of trouble. This may be preferable if the idea was bad but if it was good and the losses were short-term ones, then selling locked in those temporary losses permanently.
It’s much better to read up on investing before starting, learn about the different approaches to portfolio management, and pick what works for you. This way, any pick you make is based on a cohesive, long-term strategic approach that matches your goals.
3. Know Your Risk Tolerance to Keep Your Gains
Risk tolerance is all about how much a portfolio is likely to decline each year. This is based on a measurement called the standard deviation. This provides a percentage figure indicating how much price volatility is usual to expect each year. However, the deviation can be higher than this during a substantial market decline.
How is Volatility Measured?
Investing in stocks, and ETFs or mutual funds containing mostly stocks is a higher risk and so has a considerably higher standard deviation. Something around 15 to 25% would be normal.
Beta is another measurement that refers to the volatility of an investment in comparison to something else, like the S&P/TSX Composite index. However, beta is not a necessary risk per se.
With bonds, the standard deviation (SD) is usually a few percentage points only. Government bonds are less volatile than corporate ones. Also, the longer duration bonds are more vulnerable to interest rate hikes, and so have a correspondingly higher SD (but still less than company stocks).
Other investments such as real estate investment trusts (REITs) while holding real assets in a public form are comprised of equity and debt. Therefore, they sit somewhere in the middle of the risk spectrum.
Understand How the Markets Deliver Returns
The markets are risky.
While money is made in the long run, there are years and batches of years that perform poorly. Sometimes, the market doesn’t rise with inflation or fails to track a growing economy as much as we’d like. It all usually balances out in the end, but that takes years and sometimes decades. Also, time out of the market is problematic because a short two-month run can deliver all that year’s positive returns and more than make up for the other poor 10 months that came before it.
What does this mean for you? You need to commit to the long-term. Investments can inevitably and likely will decline by 50 percent at some point. But, history shows that if the market wasn’t ridiculously overvalued at the time, then it will rebound. However, you must hold your nerve, sit on your paper losses, and wait for a rebound without selling.
Don’t Invest Beyond Your Risk Tolerance
If your risk tolerance is too high, then your portfolio will sustain occasional substantial losses. When you have too little tolerance and invest too much in riskier assets like stocks, then this will cause so much anxiety that you’ll panic and sell right when the market is down heavily. At that point, the losses become real ones. And if you wait until the market has rebounded and you’ve regained your confidence again, and then you buy back in, you acquire far fewer shares than you previously owned.
It is one of the main reasons that investors do so poorly because they cannot keep their emotions out of investing.
4. Buy and Hold at All Costs or Not?
For serious investors, they don’t wish to day trade or trade stocks too frequently. While some day traders do incredibly well, for most people, the more they trade, the lower their returns and higher their expenses too. It is too hard to keep up with day trading for most busy people.
Should investments be “buy and hold” forever? When investing in index funds, then maybe. However, if it’s an actively traded ETF or a mutual fund, active management is involved. Sometimes, the manager’s performance lags in the market. Other times, there’s news that suggests the sector will struggle in the coming years and it’s best to exit now before the steady decline begins.
When buying individual stocks, it’s quite different. Sometimes, a company comes into favor and becomes so richly valued that it’s locked in many future years of potential growth in sales and earnings. At that point, it may make sense to sell up and invest the capital elsewhere where price growth is likelier. And if the company has a price decline later, maybe it will be valued affordably to buy back again at a reasonable price.
5. REITs and Other Income Investments
In Canada, owning income-based investments is popular. There are plenty of REITs, pipelines, oil and gas royalty trusts, infrastructure, timberland, and other possibilities.
Here, it’s important to consider both the taxable nature of the income and where the dividend is coming from. Some of these types of investments pay out income from a declining asset base, so it’s a return of capital that won’t last indefinitely. Others may be overvalued.
For instance, with REITs, investors should look at the Funds from Operations (FFO) per share/unit and compare the price to the net asset value (NAV) from the annual report. This will help determine if it represents a good investment or not. Other income investments have different ways to value them properly.
It’s often useful to read up on specific asset classes to study them closely to appreciate their specifics. This can provide an edge and prepare you properly to make gains over the years from a satisfactory investment.
6. Adjust the Investment Portfolio Nearer to Retirement
Investors would do well to prepare for their eventual retirement.
At which point, excess volatility may be less desirable when no longer working because new capital isn’t being introduced to mitigate any substantial capital losses. The financial drain of needing money every month to live requires access to income (rather than reinvesting it as previously done) and possibly selling some investments every year to cover the difference between investment income and living expenses.
It’s a good idea to plan as far ahead as possible for this transition to avoid it being a bumpy one. Also, depending on how and where your investments are placed, late changes in investment types and asset classes could trigger additional costs or a taxable event. This could leave you with less than you needed.
A successful investment strategy must be one that matches your tolerance for risk and plans that include eventual retirement. That said, your strategy will likely evolve somewhat over time, but it’s unlikely that one which hops around from idea to idea will be profitable.
It’s important to remember that other than for very short-term traders, most successful investors are less active than the average unsuccessful ones. Indeed, they make key investments and stick with them for several years which results in little annual turnover of the portfolio. This is in stark contrast to many actively managed mutual funds that seemingly have ants in their pants when it comes to their portfolio. As a result, their investors often suffer from their impatience to chase the next hot stock idea.