Financial Friday #107: Time to Jump into the Markets?
With the latest inflation rate coming in at 6.7% and interest on cash savings lagging well behind at under 2%, piling up cash in the bank is a dead-end strategy. Consequently, there are a lot of first-time investors eyeing the stock market, especially after the huge run-up in stock prices we have seen since the pandemic-induced sell-off in March of 2020. If you are on the outside looking in and wondering how to get started, check out our take on three of the most common questions we get from would-be investors.1. How do I pick stocks?
The short answer is you don’t have to (and probably shouldn't) rely on picking stocks! Even if you had the time and knowledge to investigate and evaluate potential companies to invest in, your chances of picking winners with any sort of consistency is very low. Holding a limited number of individual stocks is also a risky strategy. A more sensible approach is to choose a diversified bundle of stocks made up of companies across many industries which will help to lower your overall risk.
The great news is that there are hundreds of these bundles of stocks already pre-picked for you by teams of financial experts using all sorts of advanced analysis and inputs that an individual investor could never replicate. These bundles are called index funds and there are a number of variations - some try to emulate the return of an entire market like the Toronto Stock Exchange, while others focus on a specific industry or geographic sector.
Nothing will completely eliminate risk, but in general, broad-based index funds are less volatile and a great option when it comes time for new investors to decide what to buy.
2. Do I need a stockbroker?
Traditionally, a stockbroker was the only option to facilitate the purchase of shares. Nowadays, there are plenty of online brokerages that anyone can use to set up a trading account and easily purchase shares and many types of index funds. Whether you need a stockbroker or some other kind of advisor (like a financial coach) to help you depends on whether you want to take the time an effort to learn how to handle it yourself.
Lots of Canadians successfully manage their own investments through online brokerages and save themselves a ton of money in fees and charges. Automated investment platforms (robo-advisors) are also becoming popular because they don’t require much financial knowledge, allow for easy risk management, and are simple to use with relatively low fees.
3. How do I pick a good time to buy stocks?
Had you entered the market just after the pandemic savaged stock values in March of 2020 you would be doing extremely well — the TSX index is up around 85% from that time. The problem is that choosing the right time is always going to be hit and miss, so rather than focus on when to enter the market, you should be looking at your investment horizon.
The longer you leave your money in the market, the higher the chance that you will come out ahead of the game. You can always ramp up the risk of your holdings if you have a longer investment time frame and are aiming for higher returns, but trying to capitalize on short-term market fluctuations by jumping in and out of the market is a difficult strategy at best.
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