The Canadian stock market has witnessed high volatility in the last few years. After rallying sharply in 2021, the TSX Composite Index saw an 8.7% value erosion in 2022, mainly because rapidly rising interest rates in the United States and Canada made investors worried about the financial growth outlook of most businesses. Following this, early signs of easing inflationary pressures, especially in the second half of 2023, raised investors’ hopes that the Federal Reserve and the Bank of Canada will soon start easing their monetary stance. As these interest rate cuts could positively impact the economic outlook, the TSX benchmark recovered by 8.1% last year.
Given these expectations, it could be the right time for you to take control of your financial future at the start of 2024 to achieve your financial goals in the long run. However, navigating the stock market might not be an easy task without the right strategy. To help you with that, in this article, I’ll briefly talk about how you can build a plan to win the stock market in the new year 2024 and make progress towards your financial freedom.
Let’s start from the basics
Before diving into stock market investing, it’s extremely important for you to set clear expectations and investment goals. For example, you need to ask yourself whether you are investing to grow your money over the long term, generate passive income through dividends, or achieve short-term gains. That said, you shouldn’t forget that Foolish Investing Philosophy with a long-term approach usually yields far better returns than short-term trading.
Next, you need to determine your risk tolerance and decide how much money you want to invest. But as is true with any kind of investment, investing in stocks also involves some risks, as the stocks you invest in can go up or down based on several micro or macro factors. Investing only the amount that you can afford to lose could be the first and the most important way to limit your risks in the Canadian stock market. Second, you should ideally avoid relying heavily on a single stock. Instead, you should diversify your portfolio by including multiple fundamentally strong stocks in it, ideally from different sectors.
Identifying top sectors to invest in 2024
After setting your goals and risk appetite, you need to identify the top sectors to invest in 2024. To do this, besides looking at the current macroeconomic scenario, you may also want to consider various factors, including growth potential and valuation of the sectors.
Considering the rising possibility of interest rate reductions in the near term, banking could be one of the most attractive market sectors to consider in 2024. Many large Canadian bank stocks underperformed the broader market in 2023 as higher interest rates led to tougher borrowing conditions, trimming banks’ bottom line.
For example, Royal Bank of Canada (TSX:RY) posted a 4.4% year-over-year decline in its adjusted pre-tax profit for its fiscal year 2023 (ended in October) to $19.4 billion despite an increase in net interest income. The largest Canadian bank, with a market cap of $186.1 billion, saw a significant rise in its total provisions for credit losses from just $484 million in its fiscal year 2022 to $2.47 billion in its fiscal year 2023.
When the macroeconomic environment and borrowing conditions get better in the future, Royal Bank’s financial growth is likely to resume its course as its long-term growth outlook and fundamentals remain strong, which could help its share prices rally. Besides the upside potential in its share prices, RY stock currently offers a decent 4.2% annualized dividend yield, making it even more attractive for long-term investors who want to earn passive income from dividends.