This post will be concerned with my current short term plan for my investments. My suggestions to anyone getting started with investing will be to make it as boring as possible. The first $10,000 that someone has should go into basic index funds. An index fund models the ups and downs of the stock market and is the cheapest kind of mutual fund to purchase. Historically, there have been far more ups in the stock market (I believe an average growth of about 12% over the last 100 years) and in the long term equities have beaten every other investment so that is my suggestion.
The other options are to go for a bond index fund (which I am in) or some other kind of fixed investment. There are many theories on how these should be balanced, but a popular one is 90% - your age in equities and the rest in bonds. For example, if I am 31 (which I am), I would have (90 - 31) = 59% in equities and 41% in fixed investments. The idea behind this is that your portfolio will be less risky as time goes on. Others use the 100 - your age. Either way this will make your portfolio more protected as time goes on. Others say that about 5-10% of your investments should be in "fun" things: penny stocks, or individual stocks or things that are more risky that you can tell your friends about over lunch or at the golf course. These things are risky for a reason though, so only a small percentage of your investments should be in here (if any).
My current theory will be this: use dollar cost averaging (regular deposits that average out the highs and lows of investing) of 90% TSX index funds and 10% bond index funds. Once the TSX gets to a two year high, I will balance my assets so that 50% are in TSX Index and 50% are in bond index. I will continue to always deposit 90% in the Canadian Index and 10% in the bond index, but by rebalancing when the TSX is at a relative high, I will have collected my long term gains.
The idea behind this is to take your money out of the market when the stock market is at a relative high, and then when it drops (as in the last two years), less of your money will be in it. I consider that bonds are a relatively safe positive investment, so that is why the other half will be in that (it could really be in any fixed investment).
I haven't worked out all the numbers yet, but I consider that a high in the stock market over the last two years is enough to pull some money out to keep my gains, and that a 50-50 split is safe enough in the long term. Maybe as time goes on, I will go to a 90-age split as described above (to be more conservative).
Feel free to leave a comment about the validity of this investment strategy. By having a plan in place, I feel that all emotion will be taken out of it. It is difficult to sell when the market is moving in the right direction, but by having a plan in place it should be easier.
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you should run the numbers...what happens if (as is possible if we get out of this downturn) the TSX runs up a 2-year high for 6 months in a row? how often do you rebalance in a situation like that?
ReplyDeleteI would rebalance monthly in that scenario. The thing with this method is that it minimizes the losses. Whenever you are at a 2 year high you should be prepared for an eventual correction. But I will run the numbers to make sure.
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