I am worried about the recession. Should I sell my investments?
If you got out of the market 6 months ago, you're probably laughing right now.
The rest of us have already lost 30% or more of our protfolio value. Some analysts advise selling, others advise to ride it out. Here are some questions to consider:
• How much more is it going to go down?
• If you sold now, would you spot the bottom accurately enough to buy back in at the right time?
• Are the stocks that you picked, basically good companies that will rebound with the market?
How do I know if this the right time to invest?
So we are entering a major recession. Remember the old adage "Buy low, sell high". Should you buy now or wait a little longer for prices to drop even more
Here are some signs to look for that the economy is turning around:
• People are buying houses
• Reported unemployment rates are going down
• The retail sector, autos, and consumer spending are strong
• Companies are investing on equipment and other capital programs
There are a number of traditional approaches that are commonly used to select stocks. If you compare the returns that professional money managers get against the stock market averages (index), you will see that few of them do better just average. If experts with all their knowledge get it wrong, a person with average knowledge should be able to do at least as well. A wise investor uses as much information is available and even a combination of techniques to come to a consensus on the best investments.
Common Sense and a little bit of emotion:
Nobody advocates this as a method itself. Basically, you can't just go by the numbers but you need to do a bit of research and use some common sense in your decision.
Herd mentality: If people are talking about this company, more investors will want to buy in and drive the price up but that may have already artificially inflated its price.
International export market: When our currency is high it makes it less attractive for international buyers.
The next big thing: Does the company have a unique product that is in great demand?
Technical Analysis:
This controversial theory says that if you look at a chart of a stock's performance over time, you can predict how it will perform in the future. Stocks do tend to be cyclical. They also tend to follow trends. Looking at moving averages and volatility are common useful indicators in technical analysis. People who seriously study technical analysis have extensive formulas and terminology used in their forecasting.
Fundamental Analysis, value investing:
Warren Buffet, one of the world's most successful investors gives value investing a lot of credibility and has spawned the most accepted method for evaluating stock purchases. Basically, this method involves determining the true value of a company and calculating an appropriate value for its shares. Companies who's shares are trading for less that their "book" value are good buys.
How to "read the numbers" to evaluate a company
and decide to buy its shares
[Market Capitalization] [Trading Volume] [Price/Earnings Ratio]
[Earnings Per Share] [Yield]
Price/Earnings Ratio
share price divided by total earnings per share
P/E is one of the most commonly quoted indicators.
Low P/E usually indicates a stock that is considered undervalued.
High P/E generally reflects stock market investors expectation that a
stock will improve.
Earnings Per Share
EPS = total earnings / number of shares
Return On Equity
ROE = %(EPS / company book value)
higher is better, should be > 10%
Payout Ratio
%(total dividends paid out / total net earnings)
Undervalued
Types of investments
The TSX Group symbol change initiative for shares listed on TSX and TSX Venture
that have non-conventional voting structures was completed on December 13, 2004.
The following types of voting structures now have voting structure identifiers:
The complete list of modified symbols is available on ww.tsx.com.
Registered Retirement Savings Plan(RRSP)
Contrary to most common advice for Canadians, some people suggest that sheltering
your money in an RRSP is not necessarily the best idea for investors. You have
to pay taxes and you can either do it now when you are most in control of your
investments or in your senior years when you are trying to live off what you
have saved. People argue that your tax rate is high now and will be lower when
you retire but who knows if this will be true in the future. Successful investors
might have quite a high income in their senior years.
There are other benefits to investing outside of RRSPs. There are capital gains
and dividend income from Canadian companies that can be deducted but not if
the income was sheltered in an RRSP. Similarly for American investments, you
can not use foreign tax credits in an RRSP.
I am interested to hear if other people have wrestled with this question. Investments
not locked into RRSPs can still be used for collateral or personal emergencies.
There are a few benefits I still see for RRSPs such as disciplined investing.
You are less likely to spend money that is locked away in an RRSP. I think I
am leaning toward investing outside an RRSP these days. Has anyone else analysed
this situation?
You're right but don't expect any financial institutions to put it in their
ads. They are selling RRSP's and mutual funds. They make a lot of money "administering"
people's savings.
I've read that if you have no employer pension then RRSP's under $100,000 or
over $500,000 are worse than no RRSP at all. The first just robs you of low
income benefits and the second is taxed too high, including clawing back your
OAS benefit.
If you are single and have a medical condition which is likely to shorten your
life then the RRSP will be cashed out when you die up to 65% can go to income
taxes in Ontario (two levels of surtax on "large" incomes) instead
of to your estate. It would be better to have no RRSP at retirement in that
case.
