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Maximizing Your Investment Returns FAQ

Maximizing Your Investment Returns

Once you’re investing, the next step is growing your wealth. This section covers strategies for improving returns, tracking performance, and making smart portfolio decisions.

 Questions Covered:
If its so easy, why aren’t more people making more money?
How can I beat the TSX or S&P?
How can I find reliable investment information and resources?
How can I track and review my investment performance?
Initial Investments: Building Your All-Stock Portfolio
The second round of investments in an all-stock portfolio
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Questions

If its so easy, why aren’t more people making more money?

Many newcomers to investing wonder why more people are not making significant money in the stock market if it is as easy as it has been made out to be on all the ads for investing. The reality is that successful investing involves several factors that can complicate the process. Here are some key reasons why making money in the stock market is not as straightforward as it seems:

  1. Time, Compounding, and Starting Early: Investing is a long-term endeavor where the magic of compounding plays a crucial role. Just like an acorn does not turn into an oak tree overnight, investments need time to grow. Its never too late to start investing, but the sooner you start, the more time your investments have to compound, leading to greater potential gains.
  2. Lack of Knowledge and Monitoring: Many people do not fully understand how the stock market works and fail to keep an eye on their investments. This can lead to poor choices and missed opportunities.
  3. Emotional Decisions: Fear and greed can lead to impulsive decisions, such as selling during a market dip—like the recent drop in CrowdStrike’s stock after the global IT outage—or buying at a market peak. Sometimes, this fear of losses can even deter people from investing altogether.
  4. Short-Term Focus and Market Timing: Successful investing usually requires a long-term view. Many new investors get impatient, expecting quick returns, and trying to time the market often results in losses.
  5. Lack of Diversification: Putting all your money into one or a few stocks can be risky. If those investments perform poorly, it can lead to significant losses. Diversifying across different stocks and sectors helps spread risk.
  6. Life Circumstances and Unexpected Expenses: Unexpected expenses or life events can force people to withdraw their investments early, affecting overall returns.
  7. Starting Late: Compounding benefits grow over time, so starting late can limit potential gains. However, its never too late too start.
  8. High Fees and Costs: Investing in high-fee funds or incurring high transaction costs can eat into profits. Choosing low-fee funds and minimizing transactions can help retain more of your returns.
  9. Unnoticed Gains: People might be making money but not tracking their investments closely. They might not realize they are making money because they are not monitoring their portfolios regularly.

Making money in the stock market requires knowledge, patience, and discipline. It is not always easy, but with the right strategy, you can get your money working for you and build wealth over time.

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How can I beat the TSX or S&P?

Let’s say there are one million investors worldwide, about 90% are institutional or professional investors, leaving retail investors like us in the minority. When you aim to beat the TSX or S&P 500, you are essentially saying you will outperform over 50% of all investors, including those professionals with their teams of analysts and extensive resources. That is a tall order, and the odds are not in your favour. Instead, consider setting your own personal investment goals.

When investing, focusing too much on beating the TSX or S&P 500 might not be the best approach for several reasons:

  1. Long-Term Focus Over Short-Term Gains: Investing with a long-term perspective often leads to better results than chasing short-term market performance. The markets can be volatile, and trying to outperform them in the short term can lead to high-risk decisions.
  2. Different Goals and Risk Tolerance: Your personal financial goals, risk tolerance, and investment time horizon are unique. The TSX and S&P 500 are benchmarks for broad market performance, but your investment strategy should be tailored to your specific needs and circumstances.
  3. Diversification: Aiming to beat a specific index might lead to an overly concentrated portfolio, increasing risk. Diversification across different asset classes, sectors, and geographic regions can reduce risk and provide more stable returns over time.
  4. Market Timing Challenges: Consistently beating the market requires precise timing, which is extremely difficult even for seasoned, professional investors. Markets are influenced by countless factors, many of which are unpredictable.
  5. Costs and Taxes: Trying to beat the market often involves frequent buying and selling, which can lead to higher transaction costs and taxes. These costs can eat into your returns, making it harder to outperform the benchmarks.
  6. Passive Investing Benefits: Index funds and ETFs that track the TSX or S&P offer a low-cost way to invest in the market. Over time, they have historically provided competitive returns with lower costs and less effort than active stock picking.
  7. Psychological Stress: Focusing on beating the market can lead to unnecessary stress and emotional decision-making. It is easy to become overly focused on short-term fluctuations and lose sight of your long-term investment strategy.

Instead of aiming to beat the TSX, S&P 500, or even a friend’s portfolio, it is more beneficial to focus on building a diversified portfolio aligned with your financial goals, risk tolerance, and investment horizon. By setting clear goals and planning your portfolio to achieve them, you can avoid the pressure of constantly trying to outperform others or the market. This approach allows you to make the right investment decisions based on your personal objectives, rather than making impulsive moves to keep up with an index or peers. Consistent, disciplined investing and sticking to your plan can lead to satisfactory returns, making it less important what a stock index or others are doing. By moving the goalposts in your favour, you can focus on your own financial journey and success.

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How can I find reliable investment information and resources?

When you are starting out with investing, finding reliable information and resources is essential but can feel overwhelming given the sheer volume available. To help simplify this, check out the Educational Resources page, where I have compiled a list of books and tools that have been instrumental in expanding my investing knowledge. Additionally, below you will find a selection of resources to jumpstart your investment journey. While this list is not exhaustive, these tools should provide a solid foundation to begin building your wealth and confidence in investing.

1. Educational Websites and Platforms

  • Investopedia: Offers a wide array of articles and tutorials on investment concepts.
  • Morningstar Canada: Provides in-depth research, analysis, and educational content on stocks, mutual funds, and ETFs.
  • Canadian Securities Institute (CSI): A valuable resource for learning about investing.
  • The Motley Fool: Known for stock recommendations and investment advice, though access typically requires a subscription for its more detailed content.

2. Books

  • “The Intelligent Investor” by Benjamin Graham: A classic on value investing, widely regarded as essential reading.
  • “A Random Walk Down Wall Street” by Burton Malkiel: Covers a variety of investment strategies and principles.
  • “The Art of Quality Investing” by Compounding Quality and Luc Kroeze: Offers insights into how to identify and invest in high-quality companies.
  • “The Wealthy Barber” by David Chilton: A great starting point for beginners who want solid, step-by-step advice on managing their finances responsibly.
  • “The Essays of Warren Buffett” by Warren Buffett: A collection of Buffett’s wisdom on investing.

3. Financial News Outlets

4. Investment Blogs and Forums (exercise caution and cross-check information).

  • Motley Fool: A subscription-based service that has forums where users discuss strategies and share advice.
  • Seeking Alpha: A subscription-based service features articles and analysis from a range of investors and analysts.

5. Brokerage and Investment Platforms

  • TD Direct Investing and TD Easy Trade: Provides educational resources and tools for Canadian investors.
  • Questrade and Wealthsimple: Third party trading platforms that offer a range of learning materials and market insights.
  • Most Canadian online brokerages offer educational resources and market analysis.

6. Government and Regulatory Websites

7. Professional Advice

  • Financial Advisors: Certified financial planners (CFPs) can provide personalized advice. Consider consulting a fee-only financial advisor for personalized advice.

I have listed just a few resources that I personally use or have heard of. As you can see, there is a wealth of information available. When diving into investment research, it is important to stay focused and think critically. Begin by questioning the credibility of your sources—ensure they are reputable and unbiased. To verify accuracy, cross-check details from multiple sources and avoid taking information at face value. Building a solid understanding of financial jargon will help you navigate complex content and enhance your decision-making. Prefer insights from experts with recognized qualifications and experience, as their advice is more likely to be reliable. Finally, keep your personal investment goals in focus and seek out information that directly supports your objectives, making sure it is relevant and actionable for your financial journey. And of course, I hope you find valuable insights and learn a thing or two about investing from this site! 😊

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 How can I track and review my investment performance?

Monitoring and reviewing your portfolio is essential for understanding how well it is performing. Here is a straightforward guide to get you started:

  1. Set Clear Goals: Start by defining what you want from your investments. Are you saving for retirement, a dream vacation, or a down payment on a home? Are you aiming for long-term growth, income through dividends, or something else? Knowing your goals gives you a clear benchmark to measure your performance against.
  2. Use an Investment Tracker: Most brokerages offer online tools that automatically track your investments. These tools show you how each stock or fund is performing and give you an overall view of your portfolio’s value. For instance, TD Direct Investing and TD Easy Trade provide totals for each sub-account (e.g., Canadian cash, US$ Cash, Canadian$ TFSA, US$ TFSA, etc.), as well as an overall total for each account. These tools make it easy to track your investments.
  3. Compare to Benchmarks: To gauge how well your investments are doing, compare them to relevant benchmarks like the S&P 500 (S&P) or the Toronto Stock Exchange Composite Index (TSX). This is not just about beating the benchmark (though that is always nice! 😊) but also about ensuring your portfolio is not trending down when the markets are moving up.
  4. Review Regularly: Make it a habit to review your portfolio at least once a quarter. This helps you see if your investments are on track to meet your goals. While stock prices will naturally fluctuate, significant drops in any of your holdings might warrant a closer look to understand what is driving the decline.
  5. Adjust as Needed: Based on your review, you might decide to rebalance your portfolio by buying or selling assets to maintain your desired allocation. This helps manage risk and keeps your investments aligned with your goals.

As an investor, remember you are playing the long game. It is easy to get caught up in the day-to-day fluctuations, but do not let emotions drive your decisions. Whether you prefer to “set it and forget it” or check your portfolio daily, having the right tools in place to monitor your investments ensures your money is working for you and helping you achieve your financial goals.

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 Initial Investments: Building Your All-Stock Portfolio

When considering your first investments, focus on those that align with specific types of investments that suit your goals. Whether you are drawn to stable core holdings, income-generating stocks, high-growth opportunities, or even companies that simply bring you enjoyment, building an all-stock portfolio allows you to tailor your investments precisely to your preferences and risk tolerance.

When I first started investing, my choices were all over the place because I had no clear plan. I picked companies I was familiar with, but in hindsight, I wish I had a strategy from the beginning. As I have gotten more serious about investing, I have developed a solid plan for building an initial portfolio. Remember, there is no perfect portfolio, and no one style of investing works for everyone. Your unique situation and personality should drive your portfolio composition.

Here are my thoughts on building an all-stock portfolio from scratch:

1. Diversification: Aim to invest in 15 or more companies across different sectors and categories. This does not mean you need to start with 15 companies immediately, but it is a good target to aim for. Holding 15 to 30 stocks allows you to spread out risk, reducing the impact of any single company or poorly performing sector. Beyond 30 stocks, the benefits of diversification diminish, and managing the portfolio can become complex. Holding between 15 to 30 stocks strikes a balance between diversification and manageability.

2. Company Types: I categorize companies into five groups: Core, Income, Growth, Swing for the Fences (SFTF), and Fun:

  • Core Holdings: These are companies you intend to buy and hold for a long time, allowing them to grow and compound over time. They provide long-term growth and stability. Examples include any of the big six Canadian banks like Royal Bank (TSE: RY) or heavyweight tech stocks like Microsoft (NASD: MSFT).
  • Income Companies: These companies should have a regular dividend that yields 3% or more. I want dividends that are higher than the BoC and the Fed’s target of an inflation rate of 2%. Ideally, these companies will also see steady growth in their share price. This category generates income and can balance the more volatile growth companies. Telecommunications companies like Telus (TSE: T) or Real Estate Income Trusts (REITs) such as Dream Industrial Real Estate Investment Trust (TSE: DIR.UN) are good examples of companies that provide regular income.
  • Growth Companies: These are more volatile but offer substantial long-term growth potential. While they are riskier, investing in high-growth companies is where you are likely to achieve substantial long-term capital growth. Look for companies with innovative products or services. It is crucial to identify companies with products or services that are not dependent on unique, fleeting circumstances. For example, Peloton (NASD: PTON) soared during the pandemic when everyone stayed at home but has since seen its share price fall 85% from its late 2020 highs.
  • SFTF Companies: Typically, early-stage ventures with high-risk, high-reward potential. Only consider these after establishing a solid foundation. Monitor these closely and be ready to sell part or all of your investment if the price suddenly soars. Most of my SFTF investments have not worked out and I am now very hesitant to invest in riskier companies. An example of this was Voyager Digital (OTCM: VYGVQ). I thought this was a safer way to play the cryptocurrency craze in early 2021. However, I did not pay close attention to that investment and the company collapsed and went bankrupt. ☹
  • Fun Companies: These are companies you invest in for personal enjoyment or interest, even if you only purchase one share. For instance, I may never own a Ferrari (NYSE: RACE), but I can say I own the company. 😊 I will also never own a professional sports team, but I’m an owner of the Atlanta Braves baseball team (NASD: BATRK). 😊

3. The Trifecta Company: My favorite type of company fits into multiple categories—offering stability, income, and growth potential. For instance, Microsoft is a core holding of Portfolios 2 and 3 (core), provides income through dividends (income), and has shown robust growth (growth). Sometimes, a company may start in one category but over time expands into multiple categories. This happened with Ferrari. I thought it would be great to say I owned Ferrari (fun), but it provides a dividend (income), and the share price grew so much (growth) that I purchased additional shares.

Now that I have outlined the types of companies to consider, let us delve into some specific companies that may be a good way to start building your portfolio. For your initial investments, prioritize less volatile companies. Typically, these are large Canadian or American companies that are less volatile and lower risk, most of which pay dividends.

Canadian Companies to Consider:

  • Any of the big six Canadian banks: Royal Bank, TD Bank (TSE: TD), Bank of Montreal (TSE: BMO), Canadian Imperial Bank of Commerce (TSE: CM) and Bank of Nova Scotia (TSE: BNS)
  • Railway companies like CN Rail (TSE: CNR) or Canadian Pacific Kansas City (TSE: CP)
  • The big three telecommunication companies (Telus, Bell (TSE: BCE), and Rogers (TSE: RCI.B)) despite their recent price trends

American Companies to Consider:

Since I focus on technology companies, these are the ones I recommend, but there are plenty of other options in sectors you might be more familiar with and comfortable in.

Remember, these are not recommendations or financial advice. You should do your own research or contact a professional financial advisor before making any investment decisions. Good luck and happy investing! 😊

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 The second round of investments in an all-stock portfolio

Following up on last week’s discussion about ‘Initial Investments’ for an all-stock portfolio, this week I will share how I added to my portfolios. Keep in mind, that this strategy worked for me to achieve my goals with a level of risk that was acceptable to me. You risk tolerance and goals are undoubtedly different from mine, so this strategy may or may not work for you.

Adding Growth-Oriented Companies

After selecting a core of 3+ companies, I began adding growth-oriented companies to boost my portfolio’s value. I targeted medium and large-cap companies with strong growth histories and promising futures.

Balancing Growth and Stability

To balance growth companies with core/dividend companies, I diversified across company market capitalization (number of shares outstanding X share price) and sectors. This mix helped manage risk and ensured I could sleep easily at night.

Pairing Investments

When building the portfolios, one strategy I used was pairing investments. For example, I invested in both Visa (NYSE: V) and Virgin Galactic (NYSE: SPCE) on the same day. Visa is a stable, core/growth company with dividends, while Virgin Galactic is a high-risk, high-reward Swing For the Fences (SFTF) company. This way, Visa offset some of the risk associated with Virgin Galactic. I still own Visa but sold Virgin Galactic ten months later when it spiked, netting a 70% profit. One SFTF investment that actually paid off. 😊

Market Capitalization and Sector Diversification

Keep track of market capitalization to avoid an imbalance in your portfolio. A mix of small, medium, and large-cap companies reduces volatility and risk. A portfolio of all small cap companies is a lot more volatile and riskier than a mix of market cap sizes.

Additionally, track the sectors of your investments to prevent overloading any one sector. Diversifying across sectors spreads risk, as underperformance in one sector can be balanced by strong performance in another. For instance, during the pandemic in summer 2020, the technology sector was hot, while other sectors cooled. But in early 2021, as vaccines rolled out and people once again started going out, money flowed into sectors like Consumer Discretionary, Energy, and Industrials, while Technology cooled off.

Exploring Emerging Companies

Once my portfolio was well-diversified and I was comfortable with investing (I consider myself a part owner of every company I invest in because I am), I added a few young, exciting companies. These were high growth or SFTF companies. I investigated their products, management, and culture. They sounded interesting and appeared to have immense potential, so I bought a few shares, and monitored their performance through quarterly reports. These were SFTF companies, so their share price was very volatile. If they performed well, I bought a few more shares. Remember, you are investing in the company, not just the share price. Over the long term (3+ years), a well-performing company will see its share price rise despite short-term fluctuations.

Monitoring Riskier Stocks

For riskier stocks, typically SFTF stocks, frequent performance checks are crucial. Stay informed about the company’s health and market conditions to make informed decisions. If I had not monitored Virgin Galactic I would have missed a sizable gain. At the same time, if I had forgotten about the company, I would have lost a most of the investment as the company trades considerably lower (approximately US$ 0.35 per share on a reverse split basis). If you do not think you will be able to monitor these types of riskier stocks, avoid them all together and stick to companies that have a proven record of growth and share price growth.

Investing is a journey. I started with a solid core of companies that balanced growth and stability, and then added a few high-risk, high-reward companies (most of which did not pan out). This strategy worked well for me, but it might not be the right fit for everyone. Define what you want to achieve with your investments, create a plan to reach your goals, and take the plunge. Stick to your plan as much as possible and be ready to review and adjust it if your circumstances change. Happy investing! 😊

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