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Investment property strategy

My investment property has been constantly on my mind as the mortgage rates fluctuated in the month of June. You should get into the habit of reassessing your goals and your particular assets and liabilities to see if you're still on track.

Traditionally property investors have operated under the premise of the following two approaches.

1) Short term - (18 – 24 months) Also known as a "flip" strategy.
2) Medium term - (3-5 years) Also known as a "buy to let" strategy or "buy and hold" strategy.

When one is seeking to invest in property, one must be mindful of the following:

* Investment objectives
* Time Frame
* Risks

As an example, if one’s objective is to attempt double one’s investment within 2 years, then a Flip strategy would be favoured. Provided the investment has been chosen wisely, it is more likely to produce the expected return than a buy and hold strategy in the chosen time period.

Experienced investors are accustomed to look at portfolio investments possibly geographically disbursed across different regions and/or countries in order to diversify the investment risk and achieve a balanced return.

Assessing stock

The following is adapted from “The Complete Money and Investing Guidebook” by Dave Kansas.

In assessing investments such as stock, investors consider the stock’s valuation, strategy, plans for diversification and appetite for risk. Stocks are evaluated in many ways, and most of the common measuring sticks are easily available online or in the print and online versions of The Wall Street Journal.

The most basic measure of a stock’s worth involves that company’s earnings. When you buy a stock, you’re acquiring a piece of the company, so profitability is an important consideration. Imagine buying a store. Before deciding how much to spend, you want to know how much money that store makes. If it makes a lot, you’ll have to pay more to acquire it. Now imagine dividing the store into a thousand ownership pieces. These pieces are similar to stock shares, in the sense that you are acquiring a piece of the business, rather than the whole thing.

The business can pay you for your ownership stake in several ways. It can give you a portion of the profits, which for shareholders comes in the form of a periodic dividend. It can continue to expand the business, reinvesting money earned to increase profitability and raise the overall value of the business. In such cases, a more valuable business makes each piece, or share, of the business more valuable. In such a scenario, the more valuable share merits a higher price, giving the share’s owner capital appreciation, also known as a rising stock price.

Not every company pays a dividend. In fact, many fast-growing companies prefer to reinvest their cash rather than pay a dividend. Large, steadier companies are more likely to pay a dividend than are their smaller, more volatile counterparts.

The most common measure for stocks is the price to earnings ratio, known as the P/E. This measure, available in stock tables, takes the share price and divides it by a company’s annual net income. So a stock trading for $20 and boasting annual net income of $2 a share would have a price/earnings ratio, or P/E, of 10. Market experts disagree about what constitutes a cheap or expensive stock. Historically, stocks have averaged a P/E in the mid teens, though in recent years, the market P/E has been higher, often nearer to 20. As a general rule of thumb, stocks with P/Es higher than the broader market P/E are considered expensive, while stocks with a below-market P/E are considered cheaper.

But P/Es aren’t a perfect measure. A company that is small and growing fast may have a very high P/E, because it may earns little but has a high stock price. If the company can maintain a strong growth rate and rapidly increase its earnings, a stock that looks expensive on a P/E basis can quickly seem like a bargain. Conversely, a company may have a low P/E because its stock has been slammed in anticipation of poor future earnings. Thus, what looks like a “cheap” stock may be cheap because most people have decided that it’s a bad investment. Such a temptingly low P/E related to a bad company is called a “value trap.”

Other popular measures include the dividend yield, price-to-book and, sometimes, price-to-sales. These are simple ratios that examine the stock price against the second figure, and these measures can also be easily found by studying stock tables.

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 maxInvestors seeking better value seek out stocks paying higher yields than the overall market, but that’s just one consideration for an investor when deciding whether or not to purchase a stock.

Picking stocks is much like evaluating any business or company you might consider buying. After all, when you buy a stock, you’re essentially purchasing a stake in a business.

o The most common measure of a stock is the price/earnings, or P/E ratio, which takes the share price and divides it by a company's annual net income.
o Generally, stocks with P/Es higher than the broader market P/E are considered expensive, while lower-P/E stocks are considered not so expensive.
o Don't automatically go for stocks with low P/Es simply because they are cheaper. Cheap stocks aren't always good stocks.

With Rates This Low, Should You be Borrowing to Invest?

With Rates This Low, Should You be Borrowing to Invest?

The thought of leveraging your line of credit to purchase stock is an interesting idea. Could BP be an option if you're speculating on a 2 year trend? What about Potash and the global need for increased food production?

This strategy requires a lot of discipline and a solid understanding of your accounts payable. Being over leveraged could work against you if you're in a life change position such as wanting to buy a new home or even if you're expected to start paying for secondary school expenses.

Do your homework and don't just start blindly investing your 'borrowed' money.