Do you think you have what it takes to be a self-directed investor? You should be ready for continuous learning, improve your investment strategy, and control your emotions while exercising patience.
Within the topic of stock investing, common strategies include value investing, growth investing, and dividend investing. These strategies can be used with fundamental analysis and technical analysis.
If an investor combines value investing and dividend investing, they might look for discounted stocks that yield the high end of their historical dividend-yield range. For example, Royal Bank of Canada (TSX:RY)(NYSE:RY) is within fair-value range (with a discount of about 7%) today and yields 4.3%.
In the past five years, it has reached a high yield of 4.6% multiple times, so a value and dividend investor should wait for a pullback to about $70.50 before considering to buy.
There is so much news every day about the economy, specific industries, and individual companies, which can affect stock prices. Understanding the different forces behind stock-price movements can help you to shape your investment strategy.
Improve your investment strategy
If an investment doesn’t work out, will you just sit there or will you try to decipher what went wrong?
A friend of mine started investing in Royal Bank in 2008 for $46 per share. Her initial strategy was to buy quality dividend companies at reasonable valuations. As the financial crisis unfolded, many quality shares, including Royal Bank, fell to even cheaper valuations.
Instead of investing at reasonable valuations, she improved her strategy by setting a rule that she’d only buy quality dividend companies that were priced at a discount of at least 15% to their intrinsic values. This way, she could get more value at lower prices.
When applying this rule to Royal Bank today (which has a fair value of about $81 per share), the bank is discounted by 15% at under $69 per share with a yield of 4.7%.
Control emotions and be patient
A very important part of being a self-directed investor is to control your emotions when stock prices go up and down. What will you do if your holdings fall in price after you buy them? What will you do if your stocks fall 10%, 25%, or 50%? If the share price rises quickly after you buy, are you going to sell?
If you invest in quality businesses, generally you’ll want to buy more shares when they’re cheaper.
No matter which strategy you choose, you should have a target buy price (and a target sale price if you plan to sell) before you make a move. This will reduce emotions in your decision making and help you to be more patient in reaching your goals for each holding.
To be a self-directed investor, you should be ready to learn continuously, improve your investment strategy, as well as have the willpower to control your emotions and be patient for your investments to reach their potential before you book a profit.