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 HULT PRIVATE CAPITAL 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.
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.
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 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.
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.