Thursday, 12 November 2015

Which Investment Style are you?

So now I am sitting with this rather large amount of RRSP cash in my brokerage account.  What to do? What to do?  Google is always a great place to start.  Mmmmm let's try investment styles.  I stumble across an article in the globe and mail.  I do believe it featured John Henizl.  I can say that after reading his article on investment styles, he changed my thought process completely on how to invest.  His ideals gave me confidence to do something that I felt fit my style.  Back to investment styles.  The article featured 3 styles of investing that were pretty commonly used now.

Growth investing, Index investing, and Dividend investing.

Which one to pick?   So I started to read.  Growth investing.  Monitor stocks, determine value of stock using metrics like p/e ratio, EPS, income statements, debt, balance sheets, etc etc.  Buy when stock dips and also when it dips, it is below its value.  Buy low.  Sell High.  This is classic setup for what people think the stock market is.  Buy low, sell high.  But this classic situation does not tell you the amount of work you need to put into determining when its low enough to buy.  This style sounded alright I guess, that is if you have the passion to monitor stocks and wait, sometimes for years it says before buying.  Who has time for the research and the waiting? Not me. Not my style.

Index investing.  I knew what an index was, there were a few of them out there.  The Toronto Stock exchange is an index.  A few in the States, like the Nasdaq.  I was like ok, so what is involved here.  Reading on, it says to invest in ETFs but only the index ETFs.  I was like, Mmmmmm I remember I had an Canadian Index mutual fund.  Is that the same thing?  After thinking about it and reading more, the mutual fund Canadian index fund I had was the exact same as the ETF I was reading about.  They both copied the same stocks and their percentage or weighted in the index.  But the ETF had an amazingly lower MER than the mutual fund.  I am thinking, why on earth would you purchase a Canadian index Mutual fund when you can so easily buy a Canadian index ETF?  Ok, the investing style aims to buy indexes in all geographic areas that you are interested in.  The thought being that you will make on your Index investment, the exact percentage the index is making, less a small fee.  So basically you are average, less a small fee.  That doesn't sound that great or very sexy.  The index goes up 10% for the year.  your investment also goes up 10% less the MER.  Basically you have beaten half of the investors out there because the half that has beaten your index return, means there is a similar half of investors that did not beat the market.  Think about it, to make money, someone has to lose money.  You are average with the index investing but in this case average beats half of the professional investors out there.  A better style than growth investing but was kinda boring, in fact extremely boring style.

Dividend Investing.  Now here is where John Henizl steps in and explains his rational on how he picks stocks.  He will pick stocks that provide a good dividend yield, history of increasing dividend hikes, good dividend payout ratio, and 5 year growth.  This style interested me right away.  You mean the stock will pay me for holding the stock?  Yes, that is correct.  You get paid to for buying and holding the stock.  Now the price can go down but it can also go up.  The dividends that are decided by the company's board of directors will ensure shareholders profit from the company's financial wellness.  They also show this through annual dividend increases.  Wait a second, the dividend increases, sometimes annually?  Yes that is correct, it's almost like a salary increase every year.  Reading on, there is something called a DRIP.  Drip stands for Dividend Re-Investment plan.  Basically, you can instruct your broker or the company to reinvest the dividend they pay out to you back into the company and give you shares instead.  Now there are 2 kinds of DRIPs, a syndicate DRIP and a true DRIP.  These will be looked at in detail in a later blog, probably a blog titled Dividend Investing.  We will also talk about dividend yields, ex-dividend dates, payment dates, and dividend aristocrats.

There you have it, 3 different styles of investing.  All are great but for me, it was dividend investing.  It changed my views of investing in the stock markets.  It wasn't purely a gamble anymore especially when you see how dividends can be a true "in it for the long term" style that will for sure make you feel better on your financial wellness.

Next blog……all things dividend….

No comments:

Post a Comment