Investing: The Long and Short of it.

HAHAHAHAHAAH! That post title is the funniest thing I've ever written!!


The following will be fairly long.

Dad wanted to me to write something with regards to my investment strategies, but I don't know how valuable it'll be. I don't really have a proven track record in picking any kind of winning strategy so far. Mostly it's just involved hitting my head against a wall and mumbling about a time machine. (We all know how hard it is to get one of those...)

For investing, I just throw my money awa-...I use my online banking system provided by my bank. It provides screeners to narrow down what equities, funds, and bonds I'm looking for. There are also ratings provided and some historical and financial information. I don't know what's available to any of you when investing. Per-trade commissions are charged for equities trades, per-unit fees for bonds, and mutual funds can have different kinds of fees but I don't think there are commissions.

Mutual funds all have a expense ratio, where a portion of the value of the investment goes to the fund company. ETFs are like mutual funds, but are designed only to reflect the overall index and not a particular fund's investment strategy. They charge much lower expenses. If you don't believe that a mutual fund can consistently beat the market, an ETF may be a good pick. I pay commissions for buying/selling ETFs like I would an equity though.

Equities are stocks and fixed income products are things like bonds, t-bills, and GICs. Equities are shares in an investment or part ownership, while fixed income products are more like loans. Mutual funds and ETF could contain equities or fixed income products.

Equities usually are higher risk investments. In periods of high growth they offer some of the best returns, but if the market falters so does the investment. Fixed income products are more secure because they offer a steady rate of return and are higher in order of preference if an investment has to declare bankruptcy.

Fixed income products all involve investing a principle amount of money to buy the Treasury-bills, bonds, or GICs for a predetermined term. Interest is then paid on this either at maturity or at intervals. Bonds pay interest in cash and then return principle at maturity. Bonds can be bought and sold like stocks. Bonds have reinvestment risk, which means that you may not have an option for a similar yield as the bonds you already own when you get the interest payments. Therefore compounding your growth can be difficult.

Bond yields are a function of the bond's interest rate, payment periods, and purchase price. Two bonds with different prices and payments can have similar yields. Yield is like the value of the bond. But a bond with a high yield once purchased, will not see it's yield drop. (Unless there's a default) So when yields are dropping, bonds you already have are not less valuable. It means that your bonds now have a higher price, so if someone bought them from you, they would be less valuable to the new owner than they were to you.

Risk is identified by ratings, and yields are smaller for lower-risk/better rated issues. Governments usually have better ratings than corporations. Since there is more risk due to changing circumstances in longer terms, long term bonds (As well as other FI products) have higher yields.

GICs have terms which prevent you from redeeming or selling before maturity. GICs are gauranteed by the issuer and for CDIC members, (Like the big banks) they are insured against default as well. So they are very secure, but consequently offer less return in addition to not being liquid.(As you cannot withdraw the deposit)

Strip bonds involve someone splitting the interest from the bond principle and then selling the principle guaranteed separately from the interest at a discount. So you could buy $10,000 from the Province of Ontario in 2028 for $3,000 today for example. This prevents reinvestment risk, but default and inflation risk still exists.

While the value of a fixed income product in the market can vary, its' actual rate of return is fixed. (Barring defaults by the issuer, and excepting for the possibility of reinvestment risk for bonds)

Inflation creates pressure for more risk, because the eroding of value is proportionately worse for low return products. Growth also usually means that safety will not be as important. Poor business prospects mean that safer and more predictable properties are relatively more valuable.

So equities are over priced and a bad investment at the market peak whereas fixed income products provide their worst yields and are a bad investment at the market trough. Fixed income isn't quite, but often acts like the inverse of equities/stocks. A weakening economy is when you want to already have bonds. (Excepting that it gets so bad that issuers start defaulting) and the contrary is the case with equities.

Next I'll write about what I think about the market.