The Financial Blogger This is where your finance takes place

I recently had this conversation with one of my good friend who is a financial planner manager and we were discussing how people react when the market goes down suddenly. What bulls do in a bear market? They see red and they run as hard as they can! This is basically what people do when they realized they just lost 10% in a span of a week. They want to sell everything and buy GIC’s! It’s funny how they easily forget that they actually signed saying they didn’t care much about market fluctuation as they know their investment horizon is very long.

So before calling your bank and telling them to sell everything, here is what you should do:

#1: Pull out your file and acknowledge how good the market has been for you over the past 5 years. Human beings have this tendency of living in the present and the future but they often forget to look behind them. If you have been averaging double digit return for the past 5 years (which is probably the case for many of you), it is simply normal to lose money after a while. Calculate what is your new rate of return once the market dropped and you will probably realize that you are still making more than you would have made with some GIC’s invested 5 years ago.

#2: Revise the plan you and your financial planner have design a while ago. Look at the investment profile you signed, at the goal of this specific portfolio and the investment horizon you had determined. Chances are that you bought funds that could (and did!) fluctuate over time because you don’t need this money right away and, therefore, your investment horizon has another 10 years left.

#3: Note where your portfolio is sitting when you have a moment of panic and then wait a week. If you don’t look at your portfolio for a week and then reopen your computer, chances are that you will have enough time to think clearly about your financial situation and determine what you really want to do. Nobody likes to lose money, I don’t! But when you are taking the time to think about it, there is nothing catastrophic about loosing 10% of your portfolio. It is part of the investing game! Could you imagine the face of the people who sold their TSX shares on Monday and they saw the same shares going back up in the span of 2 days? They must tell anyone that they lost money in the stock market and there is no money to be made there. Instead, they could have waited a week and smile saying that they were tough enough to ride the wave and it paid back.

The key point when you are trading is to be able to stay calm and take your time to think before making any moves.

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Posted under Trading

Many people say that we are about to enter into a bear market. That the party is over and red ink stains will mark the financial statements of several companies. There are a lot of US banks that grant loans to individuals who cannot repay them. Everybody was so confident in the economy that they simply give away their money without looking at the person they were lending to.

We recently noticed Arab and Asian financial groups injecting 60 billion dollars in the US banks. 60 billion! Citibank was reporting a 10 billion dollars loss while Merril Lynch and JP Morgan were also looking for liquidity. And don’t think that situation is better in Canada! CIBC just issued for 2 billion in notes and National Bank did the same thing for 400M$. I’m feeling that banks are about to lose a big bet on the sub-prime market.

Unfortunately, financial institutions are always considered to be a strong figure on the stock markets. Therefore, if they are going down, they might drag several other industries and maybe the whole market with them. Is it the time to panic and sell? I don’t think so. In fact, it is the time to remember the reasons why you bought the stocks and mutual funds in your portfolio because you will need to convince yourself that their potential is real.

Several investors, including myself, have the very bad habit of looking at their portfolio on daily or weekly basis. This is basically the best recipe to start panicking. If you are like me, you sit on your computer every evening (or morning) and look at what the market has done over the past 24 hours. As stock markets are less stable than a maniac-depressive person, this is enough to make you want taking some Paccil!

If you invest with a time horizon of more than five years, you should not be worried of the daily fluctuation of your portfolio. As I said before, simply write down the reasons why you bought the investments that you are holding and look at your investment less periodically. There is no point of going back and forth with your investments; you will simply lose more money!

If you invest with a time horizon of less than five years, maybe you should not have to look at the market this way. Fixed income and highly conservative funds should be held in your portfolio. It may be the time to review your asset allocation!

Overall, the key point is to keep a steady investment strategy no matter how the markets react (or how you react to the markets!). Sometimes, it may take a few years before you can see the light, especially if you started investing at the peak of the market as we are right now!

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Posted under Trading

In my quest to get back to the trading basics, I have to look at all the factors that could influence my return on investment. In the end, what really matters is what is left in your pocket. This is why it is crucial to take a deeper look at anything that could affect your yield. I identified 4 types of trading money eaters that should affect the way you trade on the market.

Taxes

Being a Canadian, this first point is particularly affecting me. Living in Quebec makes it even worst! However, there are some tips that could help you pay less tax. There are three types of income you can earn from the market: Interest, Dividend and Capital Gains. Each of them has their specifics in term of taxation rules. In Canada for example, interest income are taxed according to your marginal tax rate as compared to only half of your capital gains are being counted as taxable income at your marginal tax rate.

There are several ways to reduce your taxes as well. For example, you have the right to carry forward any loss in order to offset future capital gains. Then, you can also use a RRSP plan or (401K in the US) to grow your investment in a tax sheltered environment. Finally, interest paid for most leveraging strategies are usually tax deductible as well.

Market Volatility

This factor is particularly important at your retirement. You certainly don’t want to see all your money bouncing up and down like a rabbit on speed because this could mean that you have to go back to work at Wal Mart to pay off your bills.

A wrong asset allocation mixed with a wrong investment profile could potentially take away a lot of money from your investment portfolio and a lot of hour of sleep from your nights. Be sure to revise your investment strategy once a year and don’t become too proud to get help from a financial professional.

Inflation

Everybody knows what inflation could do to your portfolio. This is more powerful than waves on the ocean shore. To read more about inflation and your investments, I suggest you read my post on GIC’s and their real yield. You might be surprised!

Management fees

Regardless if you manage your investment portfolio or if you have somebody doing it for you, you will have to pay fees somewhere. In fact, pretty much everybody gets in the line to collect their part of the cake when it comes down to investments transaction fees.

You can find transaction commission, trading fees or mutual funds management fees (MER’s). Those are one of the biggest yield eaters you can find!

In the end, you must be pretty careful before building your portfolio and trading. There are several trading money eaters around the corner waiting for you waste your money in the system. Be smarter and manage accordingly, this is my resolution for 2008!

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Posted under Trading

While I am not the biggest trader on earth, I still like to pick some stocks once in a while. I started trading in 2003 and for 3 years in a row, everything I touched was turning into gold. I must say it was the worst way to start trading; being in a heavy bull market. I only learned something about trading this year where things turn out to not be pink anymore. This is why I am trying to go back to the basic and relearn how to trade. So here is an easy 4 steps method to start trading.

Read

Before starting to even think about buying stocks, an individual should start reading about finance, economics and stock market for a while. When I started, I used to read financial news for an hour a day. Then, I subscribed to a finance newspaper that comes one a week. You must understand what is going on in the financial jungle before you start to walk into it. If you don’t do so, lions and other creatures are waiting for you and the party will be on their side!

Watch

Once you have a good habit of reading about finance on a daily basis and you start enjoying it, you have to observe other people’s reaction to financial news. When I am talking about people’s reaction, I am talking about newspaper, financial analyst and portfolio manager. Look at how they understand the same information that you both receive. For example, think about what you would do back in 2000 during the techno bubble as Warren Buffet was saying that he did not invest in any techno stock… Some people seem to have a 6^th sense and they don’t see dead people with it, they see dead stocks

Analyse

Once you are aware of what is going on and you take note on how people react, it is time to make your own analysis. Think about what you see and what you read and try to make links between everything. This is not an easy tasks, but making links between events will open the door a successful trading history.

Trade!

Now that you feel comfortable with the financial terms, strategies and thinking, it is time for you to build a fake portfolio. You can go on Yahoo! Finance or Market Watch in order to create a fake online portfolio. The basic service offered is free and it will be a learning experience as you can trade with real quotes and see if you are finally ready for the real thing. Before you open your account, please note that it is always easy to lose 5K of virtual money, it is something else when you are actually losing money from your own pocket!

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Posted under Trading

Losing money is never fun. There are several patterns that make us losers with our investments. I pointed 8 things that make you lose money on the stock market. There is probably more than that but we all have to start somewhere, don’t we?

#1 You can’t admit it

Most people simply refuse to admit when they commit a mistake. This is why they keep their bad stocks until the end. They know they should not have bought this stock but selling it at a loss would confirm officially that they made a mistake. We rarely find people that are able to sell their bad stock in a heartbeat without looking behind them.

#2 You are greedy and scared

When your stock is going up and up and up, you might think of selling. But are you going to do it? Or are you going to wait for another to gain another five bucks a share? Thinking that you will always make a little bit more might make you lose big time. On the other side, one can sell his stocks after a short gain of 20% in order to cash-in profit right away. If you sell too fast, you might miss a great opportunity. Maybe the stock only starts to rise. The key lies in determining the initial reasons why you made that purchase. Then, you sell only when those conditions are not met anymore.

#3 You simplify everything

The price of gas is climbing; therefore you should buy stocks from Oil Companies. Human beings have this tendency of simplifying things by generalizing from a few observations. The world of finance is becoming so complicated and is evolving continuously. This is the main reason why we are trying to make shortcuts with our brain. Try to establish a more rational evaluation grid than the simple facts that you see.

#4 You are overconfident

If you think that you are the next Warren Buffet, that your 30% average yield over the past 5 years is enough to bring you over the average investor; therefore, you might be a little bit overconfident. I used to be overconfident with stocks myself. But I discovered that it was easy to make high returns for the past five years. The real investors will be able to obtain good results in the next five years. This is where we will separate the adults from the children.

#5 You are buying the flavour of the month

One of the most recent flavours of the month was bank stocks in general. The economy was steadily growing; they were making big bucks out of the subprime market and then boom! The subprime lenders go into a crisis. This is what is happening when you are buying what it is hot at the moment: it rises to a point that it becomes ridiculous. Then, it drops back to what should be its real value. If you were at the end of the increase, you will find the roller-coaster a bit hardcore for your portolio.

#6 You are looking at the past

In finance in general, we have this good old habit to look at what happened in the past. We take the last three or last five years results and we project them in the future. However, this is completely wrong. What tells you that the company will live through the exact same environment for the upcoming years? Nothing. If we take the bank industry for example, chances are that they won’t live another magical period in the near future. The interest rate has gone up, the Canadian dollar is now at par with the US dollar and the economy seems to slow down a bit. The past conditions will not be reproduced during the next years.

#7 You are living in the past

Human beings have also this strange habit to go back in the past and think that they could have predict what would happen to a stock or an industry back then. It is easy to find a rational explanation to what happened when you have all the information and the graphs in front of you. Then, we think we are able to predict the future and replicate past tendencies. In fact, there are a very few of us that can predict the future. Don’t think you can look at graphs and obtain the absolute truth from them. Things are easy to explained, once they happened!

#8 You think you know your company

Your department just cracked their yearly objective, they are hiring and you receive a great bonus. That’s it! You invest your bonus into your employer’s stocks. It doe not mean that if you know what is going on in the inside, that it will actually being reflected in the future price of your company’s stocks (unless it is insider information, which results to be illegal). In fact, financial analysts probably know as much as you and your actual growth was expected and reflected into the shares price. Keep in mind that your department might be rolling; it does not mean that the whole company does.

In the end, if you can avoid these 8 psychological mistakes, you will have made a big step into the investors’ court. Being an investor corresponds to control your mind (and its emotional sparks) on a daily basis. Good luck with your investments!

 

 

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Posted under Trading