September 12, 2012

Investing The 12-Minute Way

Keep It Simple

You should only use financial products you understand. So, stick to the basics. Complex and complicated products often only serve those who sell them.

Same goes for stocks, only invest in solid companies you know and understand.

In this great Internet/Information era, it’s relatively simple to get data on any public company. To stay effective, we recommend you only take 12-Minute when you first analyze a potential candidate for your portfolio or watch list.  

Furthermore, many Dividend Stocks are companies you already know about and thus, it should be somewhat easy for you to understand their business model. With experience, it will become more and more obvious for you to qualify candidates.

Let’s be clear, we don’t recommend you to be negligent and to shortcut your analysis. We only recommend you to set up a simple process for your potential candidates. Setting up an effective process is probably more important than taking a lot of time to do the actual research.

Talking about financial products people really understand…Bonds are a completely different animal and are sometimes much harder to tame.

Prices of bonds are greatly affected by interest rates fluctuations. It’s somewhat difficult for most people to really grasp the subtleties of bonds. The average person tends to panic and sell when prices of their bonds suddenly go down.

Bonds are also less liquid than people instinctively think. Sometimes, you have to understand that you should hold on to your bonds till their maturity.

This is not a crash course on bonds but it’s merely an example to illustrate that some financial products are not as simple as they seem at first glance. I still believe bonds are a great investment vehicle that has a place in most portfolios but you have to take time to educate yourself about them first.

Avoid Wasting Time on Your Portfolio

You have more important and interesting things to do than to mingle all day with your portfolio. Take time to educate yourself but limit time spent managing and monitoring your assets.

If Individual Stock Investing is too time-consuming for you, we sincerely think Index Investing can be a better option for you. There’s no point sticking to it if you’re not good at it.

That being said, Individual Stock Investing still can be the best option if you simply develop the abilities to manage it effectively.

After a while, 12-Minute per week should be sufficient to effectively manage your portfolio.
At your beginnings, limit yourself to 12-Minute per day. 

Avoid looking up the value of your portfolio everyday, especially if it affects your mood or your investment decisions. Many studies have shown that emotions negatively affect portfolio returns.

Good investments are often boring. Patience will reward you in the long run. Ignore market noise and short-term fluctuations.

Have a plan and stick to it. For instance, only take time to make a buying decision when you cash balance reached a preset amount, like 1000$.

In the same way, selling decisions should only be triggered by alerts previously set by you. You should not have to look at fluctuations in your portfolio to see if it’s time to buy or sell. A good time to buy is when you have money and a good time to sell is when a preset condition is attained.       

A good way to control the time you spend managing your portfolio is to limit the number of stocks you own. Again, 12 is a good number here!

A 12-Stock Portfolio can sufficiently be diversified. And monitoring and managing only 12 different stocks can be a breeze. With 3-5K$ for each stock, your total asset value could still get to 50K$ before you consider buying more than 12 different stocks. 

Your watch list should also be relatively limited. As stated above, stocks should be pre-screened before they actually get to your 12-Stock Watch List.

Tilt the Odds in Your Favor

One easy way to tilt the odds in your favor is to limit fees.

Index investing is a good start to get away from juicy mutual funds management fees.

Do-It-Yourself (DIY) Investing in combination with Online Discount Brokerage is even better.
As Canadians, we currently use iTrade and Questrade for our stock portfolio.  

Another good idea is to limit your number of transactions.

That way, you can save on cost but even more importantly, you should expect better returns. Indeed, studies have shown that the more frequently you trade, the worse you can expect as a return. This is partly explained by what is now known as bad investor behavior.

Another great method to put the odds in your favor is to be tax efficient.

Both Canadian and US Tax Systems offer you multiple incentives to invest your money. You have to take advantage of these opportunities.

Take time to analyze what are the best tax options that exist for your situation. It would be a shame to lose a big chunk of your returns to the taxman out of carelessness.

Even though market timing is really not a good idea because nobody knows what will happen to the markets in the short term (and frankly we don’t really care because we focus on the long run), we still have another good strategy up our sleeve: it’s to buy our stocks on temporary weakness.

Even the best stocks fluctuate and go down a little from time to time. We try to profit from these temporary downturns. Depending on the type of stock that we want to buy (more or less aggressive), practically we will only buy if their price is under our preset limit.

For instance, we look for at less an 8% decline versus 52-week high for more conservative stocks. Most stocks will be bought will at least a 10 to 12% decline. Even if we rarely buy these, our most aggressive shares are acquired with a decline as high as 20 to 25%.

This is one way we can strive to achieve a reasonable margin of safety when we buy our stocks.   

Stay Focused on the Big Picture

We always view all of our accounts (our entire portfolio) as a whole, as it would not be possible to achieve proper diversification and to adequately measure returns for each account. We still have to maintain several accounts for practical and tax efficiency reasons.

One important condition to succeed as an investor is to know why you are investing in the first place.
So, setting goals, making projects and having dreams are pretty crucial to our investing well being.

Having sufficient funds for retirement is a pretty common goal. We sincerely think that Dividend Investing is one of the best courses to attain it early.

To become and stay successful invertors, we also believe in the Long Term Patient Approach. In our minds, this is one of the best possible avenues to become, step by step, financially independent.   

With our long term view, we still have pretty aggressive objectives for returns as we aim for an average annual return of 12%. We believe it’s plausible to obtain about 8% from capital appreciation and 4% from dividends.

Don’t worry; we still use more conservative figures in our projections.

In fact, despite a brutal first year in 2008, we are still right on the money wilh our 12% annual average objective as we speak in 2012. 

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