10% sounds like a huge return. It is. In fact, it’s higher than most mutual funds will be able to provide, higher even than most hedge funds. However, it is possible to do so, I have for nearly 8 years now. Yes – even through the huge market crash in 2006 / 2007.
On that note, I’m just going to list some general thoughts for now.
The disclaimer: Not a financial planner or analyst, take what I say here with a grain of salt; don’t invest (not that I’m going into details anyway) on this information alone. Do Your Own Research.
First Things First
Generally, there’s no way to get to that level of return without taking a risk.
The more risk you take, the higher your general return. It’s why you need to start investing young – you can take that risk when you are young – you have the time to make that money back. Risking it all when you are 60 is a bad idea.
Also, you will almost never get that level of return from a mutual fund. Especially once you take out their Management Expense Ratio (MER) – aka their cut. In Canada, it’s generally 2-3% of the total fund.
You won’t get there without some research. 6 – 8% sure; not a problem – stick in an ETF that tracks the market, get a balanced couch potato portfolio and you’ll do pretty well most years. It’s not great returns, but it’s a heck of a sight better than what you get in a GIC.
At 10% you need to be actively doing research, watching the general trends not only in the financial markets but the entire economy (global) so you have an idea of the way things are going to play out in broad strokes.
You also have to start looking at specific shares. And yes, that means taking risks.
It’s not as risky as you think – you can still generate damn decent returns buying things like blue chips. If you bought Telus shares in 2010 at $16.50, you’d have received dividends of $4.51 till today, received a 2:1 split and still have shares worth $34.64. That’s more than 400% returns in 3 years, or approximately 133%.
I’ll talk about specific strategies, but there are ideas out there like Buying the Dogs of the DOW, Value Investing and Dividend Investing. All of them have good points and can generate good returns, with an amount of manageable risk.
You just have to do the research (see point 2.)
Cut your losses early. I have a hard time with this one still. It’s important though. If you go up by 10% and then down by 10% you are actually behind. You have to reduce your downsides faster than your upsides.
Cash out. Remember Telus? Well, make sure you cash some of that money out when you can. Until you actually cash that money out, it’s all paper gains.
Sometimes you’ll want to reinvest that money. Sometimes you’ll want it in bonds. Whatever the case, cash out some of those gains – you might lose out on future gains, but you also miss any huge drops.
Diversify. Don’t put all your eggs in one basket. Own more than a few stocks, in more than a few sectors.
Caveat – if you have less than 5k to invest; you really should consider a mutual fund. Yeah, I know – it’s still better than nothing and it’ll allow you to diversify automatically.
Never invest money you can’t afford to lose. Really, that should be like point no.2 in anything I say.
Don’t play the market. By that I mean don’t try to invest and ‘win’ each stock, you are much better off just doing a few transactions a year (in total!) than buying and selling each month. Watch the market, but don’t play it unless you can make it your full-time job.
Practice, practice, practice! You don’t have money now? No problem – Google Finance allows you to create a ‘portfolio’ of stocks. Start doing the research now, ‘buying’ stocks and funds and tracking your imaginary portfolio. Watch how things change, and try to figure out why you are winning / losing.
You’ll learn a lot just by practising and doing your own research.
There’s no get rich quick scheme. I probably don’t need to say this – but people who try to sell you a get rick quick scheme are probably lying to you. There’s no quick way to get rich investing; not without a huge amount of risk, a lot of luck and some great connections.
Rather importantly, don’t discount luck in all this. I’ve gotten lucky more than once; but you have to be willing to put yourself in play and in position to get lucky.