So, you're looking to take over your finances and start investing on your own? Great idea! Leaving your finances up to others often leads to underwhelming returns, and often high fees. A recent 2020 study showed that 89% of actively managed funds don't even out perform the market! Why are people paying their high fees if they can't outperform the market? Often it's because people don't realize there's other options. The good news? It's now easier then ever to take over your own finances, and we're going to help show you how!
How to Choose a Brokerage?
The first decision you need to make when starting to invest is what brokerage you will use. There's many different options and they all have their pros and cons. Some people prefer to use their banks investment branch because they find it simpler to keep all their money in one place. Others prefer one of the various discount brokerages offered online as they generally have lower fees. I personally use Questrade, as that is who I signed up with 10 years ago and I haven't had any problems with them yet. They offer $0.01 per share trades (minimum $4.99, maximum $9.99), and I find their interface very easy to use. I've never had a problem with a trade not going through. I particularly find them to be the best brokerage for buying US stocks. The only problem I've had is that their customer support wait times are sometimes unreasonable, but I have been told they are working on improving that.
As an individual investor, you have a few different options on investment strategies. Some of these strategies include long term investment, day trading, index tracking using exchange traded funds (ETFs), and options trading. This article (and for the most part, this website) focuses on long term growth. We do this by investing in companies that we believe will continue to grow well into the future and are undervalued currently. We do not try to predict what the market is going to do tomorrow, next week, or even next year. We are going to talk about long-term investing and index investing for this article, as these are the two best methods for most investors’ goals in my opinion.
Fundamental analysis includes doing research on individual companies to try and find an intrinsic value for the company. This is not an exact calculation, and is a bit of an art. Everyone will come up with a different intrinsic value. There is no exact, simple formula to calculate it. You need to decide what data points are important to you in determining a fair value. A lot of people come up with a range when calculating intrinsic value, which gives you a bit of a margin of safety. One of the most common methods to do this is called the Discounted Cash Flow model. This model requires you to make assumptions of the future growth of the company to see what it will be worth in 5-10 years, then discounts it back to today to get the current intrinsic value. This can be hard to do, as you never know what the future holds, and past results don't necessarily equal future results.
- 10 Year Treasury Bond rate (This is used as a risk-free rate)
- Weighted Average Cost of Capital (WACC) (This is often used as the discount rate for companies in DCF calculations)
We will make another blog post showing exactly how to do a discounted cash flow calculation, if people are interested.
You can buy into most indexes using ETFs now, which is nice as some brokerages offer free ETF purchases (such as Questrade).