When you think of “investing” what is the first thing that comes to mind? For many of us it’s getting our money in the markets through stock purchases. Are the markets really the best place to put your money? Let’s take a look.
Anyone can purchase part of a company through the sale of stock, benefitting from their business growth while feeling good about what you’re supporting, right? In reality it isn’t so easy. There are restrictions on investments in private companies, and a lot of work can go into analyzing stocks as you try to buy low and sell high, or find high dividends.
People see stocks as a way to support companies they believe in. Unfortunately, unless you purchase during an Initial Public Offering (IPO), when the company is putting stock for sale for the first time, your dollars aren’t helping the organization. Buying stocks simply transfers ownership from another investor to you.
Contrast this with a local investment like CED Co-op, where 100% of your dollars stay in the community and support local projects. You truly are an owner, with a vote and a voice.
In recent years, automated trading has greatly increased the volume of trading. From 1990 to 2008 the number of trades on the New York Stock Exchange increased 20 times, to over 6 billion shares traded per day. Clearly there aren’t 20 times the investors, or 20 times the wealth being created, but everyone is moving money faster, trying to squeeze more out of their investments. This is the foundation of high frequency trading where computers can execute complex orders at breakneck speeds.
Options, futures, swaps, and derivatives are just a few examples of more complicated ways to invest in the markets. Each comes with their own complexities, making it tricky for the average investor to take advantage of them in their portfolio.
Lately cryptocurrency has seen a lot of media attention. It’s tempting to be seduced by past success, but how do you value this new option, and what are the risks of an unregulated market where groups can pump up the price, then dump their holdings? Every time someone makes money, someone else loses it.
As you can see, the markets can be confusing. It’s no wonder the top investors are only right slightly more than 50% of the time. Yet the average Wall Street bonus in 2014 was over $172,000.
If you don’t want to master stock analysis, or trust a trader who’s no better than a coin flip, what is a savvy investor to do? Surely local investments open to any adult in Ontario can’t match the gains of the markets?
While we can’t predict future performance (wouldn’t that be nice!) we can compare history to our returns. Let’s look at the TSX, one of the largest stock exchanges, based down the road in Toronto.
3 years ago wasn’t a great time to start investing. The TSX was almost as high as it is today. If you invested in the TSX 3 years ago you would have seen a 3.09% annualized return before fees. Our 3-year bond would have given you a 4.50% return, beating the TSX.
The TSX has us beat here. Markets have improved since 5 years ago and would have given you a 5.70% return. Our 5-year bond has a 5.00% return.
In the good times before the 2008 financial crisis the TSX was flying high. Investments in the TSX 10 years ago would only have delivered a 1.50% return over 10 years. That 2008 drop hurt, and we have only just rebounded. A smart investor who put their money in our 10-year bond, however, would have seen a 6.00% return over the same period.
This is one of the best entry points into the TSX, just after the dot-com bubble and 9/11’s effect on the markets. A 15 year investment in the TSX gives a 6.35% annualized return. That’s pretty good, but doesn’t quite match the 7.00% CED Co-op would pay for 15 years on Class B Preference Shares.
We know, past performance doesn’t equal future success. What we do know is that the markets are volatile and unpredictable. You can take a chance and come out a winner, but our predictable annual returns would have beat the market in the past, and we believe will continue to do so in the future.