Ditching your bank and investing on your own is becoming increasingly popular these days, and for good reason. Banks are charging outrageous fees and aspiring retirees are catching on, and they’re catching on quick.
I created a quick chart that highlights the potential value of your investment account when doing it on your own, using a bank, and keeping your money in a high interest savings account. The results to be honest, were staggering.
This graph is available on my website, Stocktrades.ca, and it really paints a picture on why people are attempting to invest on their own.
There’s One Key Issue With This
Although many people are starting to invest their own funds, very little are actually learning how to invest. More often than not, they simply head to the first brokerage they find, fund their accounts and start buying. I’ve been investing myself for the better part of 10 years now, and I’m still learning.
It’s an industry and task that is ever changing, and if you’re going to be successful, you must first develop the concrete knowledge needed, and then continue to adapt.
If you’re just starting out, this article is going to help you with one of those concrete concepts. And that is what type of investor do you want to be.
Three Core Investment Strategies
To me, there are 3 main forms of investing. Growth, income and value. All three require different skill levels in terms of analysis, risk tolerance and money management. Lets go over perhaps the most popular method first
Income, or dividend investing is by far the most popular investment strategy used by investors today.
When you’re investing for income, you’re still looking for appreciation in stock price, but it isn’t your primary concern. What you’re truly looking for is the dividend yield of the company.
A $10 000 investment in a company yielding 5% would give you $500 in dividends a year. Whatever the stock does in terms of price movement is simply a bonus or a detriment.
Income investing is primarily a strategy used by investors who are getting older, or have a low tolerance for risk. In order to see the reasoning behind this, you must first know why companies issue dividends.
Income companies have typically exhausted all avenues for growth. They have instead decided to return profits back to shareholders in the form of a dividend. Now, that isn’t to say they won’t grow at all, you just typically won’t see the same amount of stock appreciation as you would a growth stock. A 4% increase in stock price over the year is typically considered sub par, but combine that with a 5% yield, and you’ve got a solid 9% return.
For the more risk adverse investor, growth stocks are the pinnacle of the investing world. When a new investor enters the markets, they often have thoughts of those huge returns that turned the average Joe into a millionaire.
However, this is where most people lose their money. Growth investing requires extensive analysis of a companies financials, because more often than not you’re betting on the future with these stocks.
Often overpriced due to the speculative nature of the stocks, growth companies place profits back into the company in order to try and increase revenues and sales rather than issue dividends to their shareholders.
An investor buying growth stocks is expecting a higher return than those investing in dividend stocks, mostly due to the increase in risk, and the typically over priced nature of the stocks. While a dividend stock may trade at 10 times their earnings, you may see growth stocks trading at 20-50 times their earnings.
If you spend the time researching and learning how to evaluate these stocks, you can make profitable “gambles” much like a poker player can tilt the odds in his favor. But like I said above, these stocks require extensive analysis, and an error in judgement could lead to a significant loss of funds.
An under rated form of investing, value investing sets investors out to find stocks that are currently trading below their intrinsic value.
As we seen with growth stocks, growth investors typically are happy to purchase companies that are currently overpriced, as future revenue and earnings will boost their share price to the point where an investor makes a very healthy return.
With value stocks however, you’re seeking out stocks you believe to be undervalued. What a value investors objective truly is, is to purchase an undervalued stock and reap the rewards when the stock returns to the value that it should be.
It’s getting harder and harder to find undervalued stocks these days, as we are currently in the center of a 8 year bull run. But they still do exist, and if you’re willing to put in the extensive amount of work it takes to analyze a companies financials to see if their stock price reflects the value of the company, there is money to be made in value investing.
Overall, Find a Strategy That Works For You
Before you start investing, it’s very important to sit down and decide your overall goals and risk tolerance.
Everyone is investing for something. It doesn’t necessarily need to be for retirement. You could be saving for a down payment, a new car or even a wedding.
Every single one of these investment goals will have different levels of return needed, different time intervals and ultimately different strategies.
If you’re investing for something in the near future like a down payment, it may not be wise to invest your money into growth stocks, as market fluctuations could leave you far below your end goal. However, if you’re investing for retirement and have no need for the money in the near future, if you’re able to handle some increased risks, growth stocks can really help you accelerate your portfolio and increase your portfolio quicker.
Ultimately, the decision is up to you, and it’s one that should be made after considerable thought.