Bob Brinker's Marketimer

  Tuesday November 21, 2017

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COMMON INVESTMENT STRATEGIES
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Diversification across asset classes—or asset allocation—is one of the most powerful strategies investors use to accomplish their goals. Besides dividing your investment dollars among different asset classes such as stocks, bonds and real estate, you also can allocate them among subclasses—for example, high-growth stocks and high-income stocks. Remember, dividing your investment dollars among three high-growth technology stocks does not equal asset allocation.

Sometimes investors use a buy and hold strategy in conjunction with asset allocation. They reason that most declines in securities markets are temporary, so a long-term investment strategy ensures the best overall return. Even if the worst happens, and, for example, you must sell all your diversified stocks during a general decline in the stock market, you may still realize considerable profit if you have held those stocks for a long period. Since the stock market as a whole has grown steadily over the years, a dip in the average price of stocks today still leaves the average price much higher than it was 20 years ago.

Another conservative approach that some investors use in combination with a buy and hold strategy is dollar cost averaging. In this case, the investor regularly invests a set amount on a set schedule. For example, the investor might invest $200 every month into mutual funds. If the price of the fund is high, the investor buys fewer shares; if the price is low, he or she buys more shares. This strategy has an effect similar to that of the buy and hold strategy, with time working to "even out" the highs and lows of the market. Over time, the investor often will accumulate a sizable portfolio.

In contrast, a market timing strategy requires investors to trade securities to take advantage of short-term market cycles. Market timers buy a security when it is priced low (in a trough) and then sell it when it is priced high (at a peak) just before the market turns down again. They might then buy back the security after the market drops again. Investors who use market timing frequently look to various factors as a guide for imminent changes in direction or accelerations in the movement of security prices. These factors can include political and industry announcements, interest rate changes, and economic factors such as the inflation rate or number of new houses being constructed. Market timing requires more active portfolio management than a buy and hold strategy.

Many people apply one or a combination of investment strategies in an effort to enhance their portfolio's performance. Now let's review what we've learned.




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