In the past few months, I've been reading and learning about how to do fundamental analysis of a stock to determine its growth or value potential. I did some analysis of a few stocks listed on the TSX, and I came up with 15 potential growth candidates. I haven't done any deeper analysis yet, just some initial weeding out of stocks that didn't fit my basic criteria.
I decided to create a new portfolio in Google Finance and add my 15 hopefuls to it, just to see which ones outperformed the others. I added hypothetical transaction data to each stock so that the cost basis was around $500 for each one. This is my personal minimum amount to invest in a stock, since it makes brokerage fees around 1% of the total amount being invested. All in all, my hypothetical cost basis was around $7,700. In the two weeks since I started the portfolio, it has gone up to +3% and is now around +1.6%. While it's true that two weeks is a very short time frame for growth investing, I realized something as I checked on the portfolio every day.
I have read many times before how diversification in a portfolio is essential for mitigating concentration risk. I didn't actually realize the true value of diversification until I saw it in action. The worst of my 15 picks is currently down $62. However, my overall portfolio is up by $63. Just under half of my picks are in the red by small amounts, but from diversifying across multiple stocks I have managed to keep the overall portfolio value positive.
Since this is all hypothetical, it's purely for the sake of learning on my part. However, it made me re-examine my current strategy for my real stock portfolio. Up until now, I've been working on building a dividend growth portfolio. The dividend growth strategy is a valid strategy, however it takes a fair amount of capital before the dividends start to really pay off. The dividend growth strategy also takes patience, which I don't seem to have when I say that I'm considering switching strategies.
I have two excuses for moving away from the dividend growth strategy for the time being. Firstly, my whole investing experience so far has been all about learning as much as I can, both by reading about the vast amount of things there are to know about investing, and also to learn by doing. Learning investing through hands-on experience was my inspiration for starting this blog in the first place. Secondly, as I mentioned above, it takes a significant amount of capital to earn meaningful dividend amounts through a brokerage account every so often. It's a little different if you buy shares direct and can hold fractional shares, but that's not the case for me.
So after taking a good look at my diversified pretend portfolio, I saw the true power of diversification and the role it plays in growing your money. Since I have a very limited amount of money to invest with, I decided to try and grow my account more efficiently and effectively. Perhaps a few years down the road when I have more income available and a larger balance in my TFSA, I can consider re-implementing the dividend growth strategy.
If I want instant diversification and my TFSA is a discount brokerage account, what's the first thing that comes to mind? ETFs! I did a little research on what types of ETFs are available on the TSX, and what sectors and market caps they cover. I came up with a few choices and put them into a new hypothetical portfolio in Google Finance. Then I scrolled down to the portfolio performance window, and checked off the box for comparing portfolio performance with that of the S&P/TSX index. As it turns out, my ETF choices outperform the S&P/TSX by almost 10% over the past 12 months! I have yet to examine the risks associated with each ETF, and I also need to decide what percentage of my portfolio each ETF should occupy. I'm excited to try out a new strategy, and I've now given you fair warning for the types of posts you might see on this blog in the near future.
Thursday, June 2, 2011
Saturday, April 9, 2011
RRSP First Time Home Buyer's Plan
Just recently, I was getting my taxes done at a tax preparation company, and was discussing my RRSP with the employee there. I mentioned that I was planning on using the RRSP's first-time Home Buyer's Plan (HBP) in the next few years for a down-payment on a house. The employee also knew that I have a Tax-Free Savings Account, and politely told me that in his opinion, I should be using my TFSA instead of my RRSP to save for a house down-payment.
His reasoning was that the money I currently have in my RRSP would disappear when I make use of the HBP, and then I would be missing out on years of growth in that account until I fully paid back the balance. I gave this some thought, and while that fact is true, it's also true of the TFSA, or any other account I might decide to use. Money spent is money lost, which is money that can't grow because it's gone, no matter what account you hold it in. However, his recommendation to use a different account still merited some further reading.
After reading up on how the HBP works, I have decided that I will make a change of plans, and use an account other than my RRSP to save for a house down-payment. The HBP is essentially a loan that you owe to yourself, and that loan remains even, if you go bankrupt. While I don't plan on going bankrupt, it might still be too stressful to have that loan hanging over my head. Around the time I decide to buy a house, I will probably have just finished paying off my student loan. I know that a mortgage is also a loan, but I wouldn't want to have that extra HBP loan tacked on to me as well.
If I decide to use my TFSA or some other account to save for a down-payment, I would highly enjoy having the option and not the obligation to pay back the amount I withdraw. This also frees the money in my RRSP of dual purpose. The money I have in there currently will just stay in there and grow for the main purpose it's there: to save for retirement.
His reasoning was that the money I currently have in my RRSP would disappear when I make use of the HBP, and then I would be missing out on years of growth in that account until I fully paid back the balance. I gave this some thought, and while that fact is true, it's also true of the TFSA, or any other account I might decide to use. Money spent is money lost, which is money that can't grow because it's gone, no matter what account you hold it in. However, his recommendation to use a different account still merited some further reading.
After reading up on how the HBP works, I have decided that I will make a change of plans, and use an account other than my RRSP to save for a house down-payment. The HBP is essentially a loan that you owe to yourself, and that loan remains even, if you go bankrupt. While I don't plan on going bankrupt, it might still be too stressful to have that loan hanging over my head. Around the time I decide to buy a house, I will probably have just finished paying off my student loan. I know that a mortgage is also a loan, but I wouldn't want to have that extra HBP loan tacked on to me as well.
If I decide to use my TFSA or some other account to save for a down-payment, I would highly enjoy having the option and not the obligation to pay back the amount I withdraw. This also frees the money in my RRSP of dual purpose. The money I have in there currently will just stay in there and grow for the main purpose it's there: to save for retirement.
Saturday, March 5, 2011
Questrade Error: ECN Not Supported
Yesterday, I decided to try and place a market order to buy a stock outside regular market hours. Since I work full time and I'm not permitted to use the computer at work for stock trading at any time, I don't have access to the market during trading hours. So I logged in to my Questrade account, and decided to place a Good Till Cancelled (GTC) market order. This means that the order stands until it is fulfilled, or until you cancel it yourself. You can place a GTC type of order at any time, so that means that my buy order will take place Monday morning, when the market opens (since it is a market order, meaning buy at whatever the going price is at the time). I left the Preferred ECN setting on AUTO, and I checked off "All or none", meaning that the order should buy all shares at once, or wait until doing so is possible.
When I placed my order, I was met with the error: "Order rejected" and "ECN not supported". I tried once again, and got the same error. I decided to go on Questrade's live help chat to see if they could help me with the error. After waiting a while, the Questrade employee looked into my order history, and told me to try placing the order without "All or none" checked off. When I tried this suggestion, the order was accepted and in the "Queued" state. Monday after work, I should have my new stock.
Update: Turns out Monday after work, my order was rejected again with the error "ECN rejected". I Googled for this error and found that someone else had the same problem when placing a market order outside market hours. It was theorized that market orders are only meant to be executed immediately, so it was no surprise that a market order failed outside trading hours, even when set to GTC. I tried placing a limit order as GTC this time, set to the stock's closing price today. Tuesday after work, I should have my stock.
For information on Questrade's post-market trading policies, there is information at this link.
Update: Order succeeded.
Update: I had similar issues when trying to sell a stock outside market hours. I did everything I mentioned above in this blog post, and yet my orders were still being rejected instantly. I had been setting a limit order to sell at the closing price of that day, but I tried setting the limit price one cent higher than the closing price, and it finally worked. I came home the next day after work to find that the order had been filled, only at a different price than my limit price. Luckily my shares sold for slightly higher than I had put. All in all, very weird. I don't really like doing this trading outside market hours, but I guess I have no choice.
When I placed my order, I was met with the error: "Order rejected" and "ECN not supported". I tried once again, and got the same error. I decided to go on Questrade's live help chat to see if they could help me with the error. After waiting a while, the Questrade employee looked into my order history, and told me to try placing the order without "All or none" checked off. When I tried this suggestion, the order was accepted and in the "Queued" state. Monday after work, I should have my new stock.
Update: Turns out Monday after work, my order was rejected again with the error "ECN rejected". I Googled for this error and found that someone else had the same problem when placing a market order outside market hours. It was theorized that market orders are only meant to be executed immediately, so it was no surprise that a market order failed outside trading hours, even when set to GTC. I tried placing a limit order as GTC this time, set to the stock's closing price today. Tuesday after work, I should have my stock.
For information on Questrade's post-market trading policies, there is information at this link.
Update: Order succeeded.
Update: I had similar issues when trying to sell a stock outside market hours. I did everything I mentioned above in this blog post, and yet my orders were still being rejected instantly. I had been setting a limit order to sell at the closing price of that day, but I tried setting the limit price one cent higher than the closing price, and it finally worked. I came home the next day after work to find that the order had been filled, only at a different price than my limit price. Luckily my shares sold for slightly higher than I had put. All in all, very weird. I don't really like doing this trading outside market hours, but I guess I have no choice.
Subscribe to:
Posts (Atom)