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Friday, 31 May 2013
The best investment strategy focuses on strategy and asset allocation, not on picking the best investment year after year. Few people really have any investment strategy at all, and they lose money in years like 2008 and 2009. If you want to make money in your investment portfolio in the future, and sleep at night, read this. I'll keep it simple. The best investment strategy is not about pulling your hair out to find the best investment or even the proper asset allocation or investment mix each year. That's a formula for frustration. Instead, the MOST IMPORTANT thing you can do in the future, your best investment strategy, is much easier and requires no crystal ball. It starts with simple asset allocation; and then comes the important part. First I'll tell you why most people have lost money in recent times, and then I'll tell you what you can do to make money in the investment game without sweating the details. Most people invest much like they play any other game they don't really feel up to speed on. If they go into the game with a plan of action, they fall apart as soon as the unexpected happens. Then, they REACT as their emotions take over. That's what investors as a group have done in recent times. They've sold stocks and stock funds out of fear because the stock market went south; and put this money into bond funds for greater safety. The end result was predictable using hindsight, because this has happened before. Once again the average investor sold stocks when they got cheap, and will likely start buying them again when they feel that they are missing the boat. At that point in time stock prices will likely be high and ready for another tumble, if history again repeats itself. Now, let's focus on the best investment strategy for getting and staying on track in the future. Asset allocation refers to how you invest your money across the asset classes... stocks vs. bonds vs. truly safe and liquid investments. Even if you just invest in a 401k plan or in other mutual funds, the following investment strategy is available to you. To keep things real simple, assume you're looking at your investment options in your 401k or fund company you invest with. The options will be similar. What percent of your total investment portfolio are you willing to put at risk to earn more vs. what percent do you want safer vs. how much do you want really safe? Let's say you're willing to put half at risk, but want the other half as safe as possible. Your asset allocation: 50% to stocks funds and 50% to a money market fund or stable account if you have one available. That's how you allocate the money you already have invested, and that's the way you allocate any new money you invest periodically. Once you have repositioned your money to 50% stocks and 50% safe, the really important part of your ongoing investment strategy comes into play; and here is where investors drop the ball. At least once a year, or when the stock market action is extreme, check your asset allocation percentages. REBALANCE if you are not still close to 50-50. If you had done this in the recent past, you would have made money in your investment portfolio. You would have made money in the past decade as well. Here's how the rebalance part of our best investment strategy would have worked with the 50-50 example in 2008-2009. If you went into 2008 at 50% stocks and 50% safe, by early 2009 your safe investment would have been worth more than 50% of the total vs. your stock funds since stocks took big losses in that time period. To rebalance you would have moved money from the safe side to your stock funds to make both sides equal again. In other words, you would have bought stocks cheap. Then a year later in early 2010 your stock funds would have accounted for well over 50% of your total, since stocks soared the last 9 months of 2009. So, with things again out of balance you rebalance again in early 2010, which means you move money from stock funds to the safe side and lock in some profits. As a long term plan this is your best investment strategy because it has you buying stocks or stock funds when prices are lower, and taking profits when stock prices have risen. Emotion and guess work are taken out of the picture. Focus on balance and rebalance. Some 401k plans and other retirement programs offer this service and will automatically do it for you per your instructions at no cost. To keep things real simple, just rebalance once a year, like in January. This way you won't forget and let things get off track. A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
Does the idea of a high risk high reward investment strategy excite you or make you scared? It is the general perception amongst most people that in order to make spectacular gains you must take spectacular risks. This is definitely a myth as there are plenty of investment strategies that allow you to make massive profits with very little risk. Today I would like to have a look at some of the emotional and decision making processes that take place when using high risk high reward investment strategies. Am I saying that high risk investment strategies are bad? No definitely not, high risk strategies have a time and place but they must be one of many strategies that you use - not your main investment strategy. I would also like to mention that there are plenty of ways to make high rewards without necessarily taking high risks. If your broker suggested that you have a look at a particular trade that required $1000 that would double to $2000 if it was successful or you would loose half ($500) if it was unsuccessful - what would you do? In my experience most people are pretty happy to accept the challenge and take a small risk for the prospect of a very good profit. Would your decision change if your broker offered you the same trade but instead of $1000 you had to put $100,000 o the line. So if successful your profit would be $100,000 or your loss would be $50,000. Suddenly most people aren't too keen to take on the trade - Even thought the odds are EXACTLY the same. Obviously the prospect of losing $500 is much less frightening than losing $50,000 but I believe that it shouldn't make any difference to your decision making process. A high risk high reward investment strategy is exactly that - an investment strategy that that has the potential to loose or win you a lot of money. I prefer to look at all investment strategies as a percentage rather than in dollar terms. This has two main benefits that are vital to developing a strong mindset that is vital when trading (especially if you are using high risk high reward strategies). 1. It makes you look at the trade in relation to the actual value of the trade. The above example is the exact reason why this is beneficial. Should you place a trade that has the ability gain a profit of $100,000 or a loss of $50,000? There is no right or wrong answer but if you start looking at the percentages of the trade you will be able to make a much clearer decision. Always make sure the numbers stack up no matter how big or small the trade is and especially when you are using high risk high reward investment strategies. 2. The best thing about looking at your trades in terms of a percentage is that it stops you from getting to emotionally attached to the profits and losses that you will inevitable have. For instance if you were to make a $5,000 profit on one particular trade it is very easy to start getting ahead of yourself and spending the money on flights around the world, cars, boats etc. If you keep focused on the Percentages you can be extremely happy with your trade but not get to over the top. Using percentages is even more important when you have a loss on the stock market. When you lose money is very easy to start thinking about how many hours of 'normal' work you have just lost and very quickly you are so depressed that you never want to trade again. It is quite common for new traders to want to quit after their first loss on the market - even if they have still made a profit over all! Using percentages gets you away from this mindset and makes you analyze your profits and gains in a much less emotional state. So does this mean that high risk high reward investment strategies are a thing of the past? No, it just means that you should really think about the pro's and con's of every investment that you make. One of the main reason why people love using high risk high rewards investment strategies is because they love the feeling of taking risks. You only need to go to the casino to see that many people are addicted to the rush of gambling with their money. The question you need to ask yourself when you are placing a trade is - are you Gambling or are you Trading?
For the average investor, the best investment strategy for 2013 likely won't be the traditional investment strategy commonly recommended by the investment companies and their representatives. Change is in the wind, and one of the best ways to deal with this is to make adjustments to the asset allocation strategy in your investment portfolio. For over 30 years the investment industry recommended that the best investment strategy for most investors was an asset allocation of: 50% to 60% in stocks and 40% to 50% in bonds. The investment vehicle promoted was mutual funds - stock funds and bond funds. This kept things simple and actually worked quite well. Losses in one asset class were often offset by gains in the other. This investment portfolio produced both good growth and income for average investors over the years. As 2013 unfolds it's time to review your asset allocation. Sometimes the best investment strategy is to be a bit more conservative than the tried and true strategy of yesterday. The stock market has more than doubled in value since early 2009. Bond prices are near historical highs, with interest rates pushing all-time lows. The markets are in a state of uncertainty, as Americans in general are fed up with the lackluster economy and the Congressmen who represent them. Having followed the markets for over 40 years, I have never seen a tougher environment to invest in. Putting together the best investment strategy has never been more difficult. All of the investment asset classes appear to be selling at high price levels, with real estate being perhaps the exception. So, let's take a look at the things to consider in your asset allocation strategy. If you are one of the millions of every-day Americans who are relatively heavy into bond funds, consider cutting back on your asset allocation to these funds. Bond funds are NOT safe investments in today's low-interest-rate environment. Your best strategy: no more than 30% or 40% invested in bonds or bond funds. Even U.S.Treasury bonds (T-bonds) will lose significant value if interest rates go back up to normal levels. Also, if you hold long-term bond funds, consider moving to intermediate-term funds that hold bonds with an average maturity of about 5 to 7 years in their investment portfolio. Bond funds that hold long term bonds, maturing in 20 years or more, can lose significant value when interest rates head upward. With this investment strategy you will receive a bit less in dividend income, but you will gain by significantly increasing the safety factor. Millions of Americans have lost faith in the stock market, and many have sold their stocks funds to buy bond funds. The average diversified stock fund gained more than 100% between early 2009 and early 2013. If you missed this opportunity, it is not the best investment strategy to jump in big time and play catch-up now. But, depending on your risk profile and age, you should consider an asset allocation with 20% to 50% going to stock funds. In times of high uncertainty diversification is one of the investor's best friends. Let this thought guide your investment strategy and asset allocation when picking stock funds for 2013 and beyond. Include a variety of stock (equity) funds in your investment portfolio. The perfect place to start is with a diversified large-cap equity fund like an S&P 500 index fund. With an S&P 500 index fund you own a small piece of 500 of America's largest, best known companies. Make this your largest holding in the stock portion of your investment portfolio. Then, add an international equity fund to your portfolio. Also include specialty funds in your investment strategy that focus on specific sectors like real estate, gold, natural resources and basic materials. These funds have sometimes been the best investment when the stock market in general is weak. Now that you have cut your asset allocation to stocks and bonds, where do you invest those proceeds? Cash is your other friend when uncertainty is high. Cash refers to safe, liquid investments like money market funds or money in bank savings accounts. Sometimes the best investment strategy includes keeping some powder dry awaiting future opportunity. Your best investment strategy for 2013 is to modify your asset allocation in stocks and bonds so that risk is only moderate. Diversify broadly across the asset classes, and have cash available so you can take advantage of future investment opportunities. This strategy will keep you in the game, with less risk than yesterday's conventional investment strategy.
Okay, you've decided what you want to accomplish by investing, and you know what kind of stocks you are looking for. You have a handle on the potholes that can hold you back, and you've learned how to number-crunch to analyze a stock's performance. You have one step left: deciding how you will apply all this knowledge to your investments. This is both the easiest and the most difficult step of all. Think of it as buying a car. You've done your research: You've compared the prices at other dealers, you've checked the prices of comparable cars. You've checked the car sales market to find out how this brand is selling and when the best time to buy one is. You've even spoken to prior customers to learn just how the salesmen here haggle. What's your initial offer for the car going to be? How much will you accept for payments? What options do you want in the car? It's time to start making some real choices. An investment strategy is rarely black-and-white. Instead, investment strategies are usually a mix of the different options available. My own experience has been that as my portfolio grows, my investment options grow in direct proportion. In addition, the number of investment strategies represented in my portfolio grows, also in direct proportion. Investment strategies, like investment objectives, should remain fluid in order to adapt to the different circumstances in which you will find yourself, as well as to accommodate any new ideas you yourself will come up with. An exhaustive list of investment strategies is impossible because they are as individual as the people who employ them. Stories circulate about people who pick their investments by using dart boards, astrology, and (so I've heard) even monkeys. As a new investor, however, you should be aware of some of the more popular (and saner) methods people employ for investing in their stocks: The recommendation strategy The research strategy Buy and hold Dollar cost averaging Mix and match as you see fit; take what you want and leave what you don't like. In the world of investing, the only right answer is yours. Recommendations When people learn you have begun your investment career, "experts" will begin to crawl out of the woodwork. In all fairness, a significant number of recommendations you receive will have true merit. People who discuss the companies they work for are certainly in a better position to discuss their internal structures than the average person on the street. TIP: A recommendation is advice or information, sometimes unsolicited, received from other people who may possibly have better insight into the stock than you do. Furthermore, your friends and family may be able to provide real insight into a company and its products and services with which you may be unfamiliar. When deciding whether to invest in Home Depot, for example, I asked a friend of mine who is an engineer to tell me of his experiences with them. I write financial books; I couldn't hang drywall if it came up and introduced itself to me. After our discussion, however, I felt much better about my final decision. I asked my brother for much the same kind of information before making an investment in a video game stock. I don't play video games, but he does extensively. My discussions with him enabled me to make an intelligent decision about which games were hot, which systems had problems, and what innovations were being anticipated by consumers. The other side of the coin is best illustrated by a great commercial currently running on television. A young guy walks up to a very distinguished gentleman in an art gallery and whispers to him, "I overheard your stock recommendation last week and put all my money in XYZ stock." The older gentleman replies, "Good for you. They will be the only company authorized to produce Widgets once the Martians take control of Earth," as his nurse leads him back to the home. The moral is obvious: Recommendations are a wonderful source of information as long as you know their source and the recommender's expertise on the subject. Research Research is a vague term, and it could include pretty much anything. Asking people to share their experiences is research, so is requesting a copy of the company's annual report. Checking the general press is research, as is digging up evaluations of the stock on the Internet. As a result, a precise definition of "research," one that applies to every stock and/or investor, is difficult to give. That does not mean that research in itself is impossible to determine, but rather that each individual investor needs to determine for himself or herself which "research" pertains to the type of investment decisions he or she is evaluating. Besides asking my brother for his insight into video games, I also checked the total sales of video games per year in the United States on the Internet. I read several articles on the system that was being launched and its implications on the video game market. Any investment decision you make should require some research. The extent is really up to you, but the time you are willing to contribute toward being ultrafamiliar with your investment decision correlates absolutely with the investment's success. By cheating on investment research time, you are ultimately cheating yourself. Make no mistakes about it; this kind of cheating will cost you cold hard cash. Buy and hold Buy and hold is a wonderful strategy for any newcomer to the market and is equally attractive to investors of any experience level. Basically, buy and hold works like this: Since the inception of stock markets, the value of the stocks being traded has eventually risen almost without exception. This passive strategy, buy and hold, works on the principle that if you purchase a stock and let it sit where it is long enough, you will eventually realize a profit. Whether that means 5, 10, or 20 years is uncertain, but remembering that your investments are part of a larger goal, it's pretty certain you'll see a profit before your dream becomes accessible and you are therefore ready to sell your shares. TIP: Buy and hold is an investment strategy whereby an investor purchases a stock and leaves it alone. Buy and hold usually implies that dividends will be reinvested in subsequent purchases of the stock. For a buy and hold strategy, you would want to consider stock in companies that have the potential to be around for the long term. Consider blue chip stocks or stocks with good growth potential to achieve this. In addition, instead of collecting dividends, newer investors should seriously consider reinvesting their dividends into subsequent stock purchases. Many companies will execute these subsequent purchases without adding sales loads, making the investment even better. In addition, by negating broker fees and allowing compound interest to perform its magic on the initial investment and its subsequent dividend reinvestments, even the most novice investor is better placed to realize a profit. Finally, the most important benefit of the buy and hold strategy is almost certainly not having to spend an inordinate amount of time researching and following other investments. The buy and hold strategy is often referred to as the buy and forget it strategy for that very reason. As a new investor, you will have your hands full becoming familiar with the entirety of the market. Rather than make several different investments over time, you are bound to do better by thoroughly researching one investment and "letting it ride." Your broker will hate you because his or her commission is based on the number of total trades you perform, but your banker is going to love you as you keep those brokerage fees in your own account in the bank. Dollar Cost Averaging Dollar cost averaging is another wonderful investment strategy that merits serious consideration by newer investors. In dollar cost averaging, you invest a specific amount at a regular interval: taking a set amount out of each paycheck, for example. The critics are undecided whether this type of investing produces an optimal or a mixed result, and statistics can be found to accommodate either view. What is certain, however, is that dollar cost averaging does not produce bad results, and it brings people to the table who might not otherwise be investing. One of the single biggest excuses people give for not being in the stock market is that they don't have enough extra money to invest. However, if the average investor waited until he or she had hundreds of thousands of dollars to invest before becoming active, the American stock market would be a very different place than it is. People with large portfolios are rarely those who have received a lump sum equal to the current size of their portfolios. Rather, these large portfolios were created by making systematic smaller investments. By the way, dollar cost averaging is not guaranteed to produce higher stock prices for people who choose to invest this way. Should you be concerned about the price you will pay for stock as it fluctuates over the period of a year, you can use the following table to chart the average price you would have paid for a stock by using dollar cost averaging versus the average price of the stock over the same period. Used in retrospect (over the previous year), you can garner a pretty good idea of the potential for an optimal price using dollar cost averaging to purchase your prospective stock.
In every game, you need to have a good strategy to win. The same also applies in stock investing. A good strategy when well implemented always assures a win or profit in the investment. If you are planning to make an investment you must at least have a strong strategy to use. If you do not have yet you can start making it now before you delve into a risky investment. You can ask for advise from other investors or you can search the net for a sample investment strategy that you can use or at least analyze. You can review this sample and learn how it works and how it was made so you can also make your own based from the sample. There are several websites in the Internet where you can get a sample investment strategy. Most of these sites offer different types of strategies that were proven effective in some types of investments. You can search for the one that is fitted to work on the type of investment that you will make. Almost all of the strategies that were used by successful investors are available on the net. You just have to patiently search for the right strategy for you and your business. You can check the reviews about those strategies to know the possible results or problems that you may encounter when using that strategy. It is wise to listen from the ones who have used it. Making you own strategy is a tricky task. You have to think of several things such as the type of your investment, the duration of your plan, the advantages of your strategy, the risk of your investment and how you are going to treat it, etc. This work can be simplified if you are going to use a sample investment strategy that will serve as your guide. You don't have to go deep into thinking of what your strategy will do for you. You don't have to do a series of trial and error experiments to get the best out of your prepared strategy. The Internet has it all and all you have to do is use it in the actual investment as if you are not new to the stock market. When getting into an investment you must not rely to only one strategy. You might use at least two strategies. You should have a backup strategy if ever your first strategy fails or won't give you the result that you wanted. Drafting out two strategies means you have to use another sample aside from the first sample investment strategy that you have used. Once you have them all you can face the challenges and the risks that your investment might have. Just be confident and use your strategy according to your plan.