Investment strategy and planning for 2011

For followers of my blog since the recession started, I hope you did as well as I did trading around positions in gold, oil, metals and banks. As 2010 comes to an end, we should start looking at what we should do in 2011.

First things first, evaluate your own house, figure out where you are and where you want to be at the end of the year. Also figure out your investment horizon and risk tolerance.

If you have low risk tolerance, get stressed when the market drops 100 pts, have a large mortgage, not able to save after bills are paid...... then stop here, don't read on, and focus on coming up with ways to save money and pay down debt/accumulate savings - see my other posts on the $10K savings challenge.

if you want to take charge of your finances, read on.

Action plan 1: contribute to your TFSA and grow it - this is the best savings vehicle for everyone - any interest/gains/dividends received is tax free forever. If you want to focus on growing something, this is the vehicle to put some effort into. if you do well in the TFSA, all future dividends are tax free (forever). I recommend investing in dividend paying stocks and write covered calls (3 months out), collect both dividends and ~ 5% premium per 3 months.... (you will need a self-directed account for this).

Action plan 2: contribute to your RRSP and then use the tax refund to pay down your mortgage ..... your mortgage is not tax deductable and the interest is after tax..... 4% is ~ 8% of interest income.

Action plan 3: rebalance your investment portfolio - are you too heavily weighted in one sector/area?
Look at your investments to make sure you are diversified in a few sectors/areas - fixed income, real estate, cash, metals, stocks etc. it really depends on the individual so there is no "magic" formula that works for all. A long term balanced portfolio could have 5% cash, 20% dividend stocks like banks, 20% commodity stocks, 20% rental properties or REITS, 25% bonds or GIC and 10% high tech or smaller cap stocks for growth. If commodity stocks goes up significantly, then the other sectors will drop in % weighting. Rebalancing will force you to take some profits on the commodities and move the profits to other underweighted sectors.... it's a disciplined approach which makes sure that you do not get decimated in the event a particular sector collapses.

Strategy
1. look at the macro and micro economic factors - where is the economy heading to ..... we are cautiously exiting a recession and a long period of excessive borrowing. In a slow recovering environment, the best play is strong, solid companies with consistent dividend paying track record..... long term capital gains plus a decent 4% yield. for more sophisticated investors, take on writing covered calls or writing uncovered puts to pick up positions can add significantly to the annual return.

2. look at where the growth is - China, India and Asia ... participate in investing in global ETF's or foreign stocks or investing in commodities (metals, oil) ..... watch out for currency risks.

3. don't chase old stories and hot stocks that have been going for a while .... look for the next area - this is difficult but the internet is an amazing thing, it levels the playing field significantly for information mining. Trouble is determing what is real and what is not.

As I develop forward strategies, I will add to this blog, stay tuned.