Ok, here it is…
How to make millions on the stock market 101
First of all, you need to know that there is no magic on the market and you shouldn’t expect to make huge amount of money in the short run. You have to look at the market in long term (over 5 years). In the history of finance, the yield of the major indexes ALWAYS beat Canadian or US bonds or any period of 20 years or more, and by a good amount. Also, the stock market is the best way to protect yourself against inflation, bonds don’t protect you. From this, we can conclude that the safest place to put your retirement money is on the stock market (at least when you aren’t planning to retire in the next 20 years).
What to buy?
Mutual funds are very popular because financial company and banks promote them as much as they can. The fact is that less than 10% of these manage to beat the indexes and that’s even less when you factor in the management fees…
What’s the solution?
You should invest in mutual funds that emulate one of the major indexes (TSX, SP500, DOW, etc). These funds are easy to get (most financial company offer them) and best of all the management fees are VERY low (as in 0,03% from TD Waterhouse).
This is the easiest and safest way to invest. But beware! Don’t buy all the shares at the same time, fraction them so you would get them every month. This way you are protected against price variation in the short them.
But how can I beat the market?
The advice I just gave would allow you to (almost) follow the market without beating it. Now the method to beat it… Its called Dogs of the Dow (do some googling on it). Since we are in Canada, it would be called Dogs of the TSX. I won’t explain here why this method works because it would be too long but you just have to do some research and you will find it. The trick is to take the 10 company from the TSX that have the best dividend yield at a fixed date and put 1/10th of your investment in each. One year later, you sell them all and do the exercise again. Since the transaction cost can be high if you have less than 10,000$ there is a short cut version of it: you only buy stocks from the company with the second, third and fourth best yield. You shouldn’t take the best yield because to reduce risk. This shortcut version is more risky but still gives good result. Another variation is to invest in the stocks from this list which have the lowest cost so you can get more shares (probably the best technique if you are starting your investment plan and don’t have much money).
How does it work?
The idea behind this method is that big company never dare to reduce their dividends. So by buying them at a fixed price, you are sure of the rate you are going to get. Another point is that the reason these companies yields are so high is because they are undervalued by the market and eventually their value will increase (thus reducing the dividend yield). This is a quick and dirty explanation and I encourage you to dig for more.
Finally
I am not a financial advisor and you shouldn’t take my advice as the holy truth! Markets fluctuate and I don’t want to be responsible if you lose all your retirement money… I just want to point out these two easy ways to make money on the stock market and you should dig the web for more information about them. Don’t trust your financial advisor, most of the time they will propose you mutual funds with high fees because they get better commission out of them. If you feel insecure and still want to meet one, ask him first who pays his salary, it’s a big indicator of his motivation.
Oh.. Never follow the hype! It’s better to invest in unpopular sector than in the popular ones, unless they are in a crisis of course (à la Air Canada…). Any one remembers the hype of the late 90’s about technos?
That’s about it for today, comments and questions are welcomed unless they are about my bad english spelling.
How to make millions on the stock market 101
First of all, you need to know that there is no magic on the market and you shouldn’t expect to make huge amount of money in the short run. You have to look at the market in long term (over 5 years). In the history of finance, the yield of the major indexes ALWAYS beat Canadian or US bonds or any period of 20 years or more, and by a good amount. Also, the stock market is the best way to protect yourself against inflation, bonds don’t protect you. From this, we can conclude that the safest place to put your retirement money is on the stock market (at least when you aren’t planning to retire in the next 20 years).
What to buy?
Mutual funds are very popular because financial company and banks promote them as much as they can. The fact is that less than 10% of these manage to beat the indexes and that’s even less when you factor in the management fees…
What’s the solution?
You should invest in mutual funds that emulate one of the major indexes (TSX, SP500, DOW, etc). These funds are easy to get (most financial company offer them) and best of all the management fees are VERY low (as in 0,03% from TD Waterhouse).
This is the easiest and safest way to invest. But beware! Don’t buy all the shares at the same time, fraction them so you would get them every month. This way you are protected against price variation in the short them.
But how can I beat the market?
The advice I just gave would allow you to (almost) follow the market without beating it. Now the method to beat it… Its called Dogs of the Dow (do some googling on it). Since we are in Canada, it would be called Dogs of the TSX. I won’t explain here why this method works because it would be too long but you just have to do some research and you will find it. The trick is to take the 10 company from the TSX that have the best dividend yield at a fixed date and put 1/10th of your investment in each. One year later, you sell them all and do the exercise again. Since the transaction cost can be high if you have less than 10,000$ there is a short cut version of it: you only buy stocks from the company with the second, third and fourth best yield. You shouldn’t take the best yield because to reduce risk. This shortcut version is more risky but still gives good result. Another variation is to invest in the stocks from this list which have the lowest cost so you can get more shares (probably the best technique if you are starting your investment plan and don’t have much money).
How does it work?
The idea behind this method is that big company never dare to reduce their dividends. So by buying them at a fixed price, you are sure of the rate you are going to get. Another point is that the reason these companies yields are so high is because they are undervalued by the market and eventually their value will increase (thus reducing the dividend yield). This is a quick and dirty explanation and I encourage you to dig for more.
Finally
I am not a financial advisor and you shouldn’t take my advice as the holy truth! Markets fluctuate and I don’t want to be responsible if you lose all your retirement money… I just want to point out these two easy ways to make money on the stock market and you should dig the web for more information about them. Don’t trust your financial advisor, most of the time they will propose you mutual funds with high fees because they get better commission out of them. If you feel insecure and still want to meet one, ask him first who pays his salary, it’s a big indicator of his motivation.
Oh.. Never follow the hype! It’s better to invest in unpopular sector than in the popular ones, unless they are in a crisis of course (à la Air Canada…). Any one remembers the hype of the late 90’s about technos?
That’s about it for today, comments and questions are welcomed unless they are about my bad english spelling.