How to Develop an Investment Strategy

As the expression goes, those who fail to plan, plan to fail. This rings especially true when it comes to planning an investment strategy. Someone who jumps into the stock market without a clear plan will stand to be unsuccessful and lose a lot of money. There are a few things that everyone should keep in mind when planning their investments in order to be successful.

Before getting started with investing, it is important for someone to clearly define their investment goals. They should consider if they just want to make some extra money or if they want to eventually quit their day job and invest full time. It is also important for someone to decide how much they want to make and, more importantly, how much they can afford to lose. If this is too complicated for someone to determine on their own, they should consult with an investment advisor.

The other thing that someone should do before they even get started with serious investments is get themselves out of debt. This means that they should pay off everything from their credit cards to their mortgage and student loans. If they add up how much they spend each year in interest, they will see how much money they could be investing if they did not have any debts.

When someone finally gets started with their investments, they should not run before they have learned how to walk. It is best to start out with low risk and low maintenance investments that remain steady, such as selling options. Risks should be saved for after someone has built up the capital to invest further and has the time to focus on more high maintenance investments.

It is also very wise for an investor to make sure that their portfolio is diverse. This means investing in stocks, bonds, CD’s and mutual funds. It also means that they should invest in a variety of different industries. The philosophy behind this is basically that nobody should put all of their eggs in one basket in case one of their investments fails for some reason. It is always smart to have a safety net in the event of the worst case scenario.

A good investment strategy can make the difference between success and failure when it comes to investing. Before investing, it is important for new investors to get out of debt and think carefully about how much money they can afford to use for their portfolio. Having clear investment goals and planning for them is the best way to have financial success with investing.

Six Steps to Building an Investment Strategy

What is an Investment Strategy?

An investment strategy is critical towards building a successful portfolio. The whole reason why you invest is to make money. You need to be a smart investor, have the right knowledge, know what you’re doing, have a plan, and be ready to make the right choices.

Your investment strategy is your plan for success. It is the big picture of what you’re going to do. You need to strategize when you choose investments or else you will be risking bad choices and bad investments.

Why do you Need an Investment Strategy?

An investment strategy is critical for success. Those who make wild guesses are merely gambling and will be lucky to make a low return. You’re objective should be to maximize your earnings. You can’t do that without an investment strategy.

You need an investment strategy in place in order to keep track of your investments as well. Why did you buy those bonds? Why did you make that trade? Why should you choose this stock over that one? When you ask yourself these questions, a good strategy should help you answer them.

How do you Build an Investment Strategy?

When it comes to actually building your investment strategy, it will take some time, effort, learning, and planning. Follow these steps to build your own investment strategy:

Step 1: Decide on your Investments

Before you buy anything, decide what you want to put your money into. Don’t simply say, “I want the best investments.” Be specific. Are you going to buy stocks, bonds, mutual funds, real estate, commodities, etc.? Are you going to invest in one type of security or multiple ones?

The more you invest in, the more time and effort you’ll need to put into it. Keep this in mind when you are choosing a larger variety. Don’t spread yourself too thin or else you will make less money. Investing in a larger variety of securities, companies, etc. will not make you more money. You need to be diversified, but you need to be smart about it, too.

Step 2: Gain a Strong Knowledge of What you are Going to Do

Now that you know what securities you will put your money in, gain as much knowledge as you can about it. Get books, courses, look online, etc. and learn everything you can about what you’re planning to do.

If you are absolutely brand new to this, start with the basics. Even if it takes a few more months before you get started, it will be worth it. It’s better to wait a couple of months and break even or make a return than it is to get started right away and lose a lot of money. If you are worried about gaining experience, work with a free stock market simulation game until you are ready to invest real money. You can find further information on this type of game and get started at the link below.

If you find the information overwhelming, stick with studying one security. For example, stick with learning about stocks and plan to invest in 6 to 10 stocks first. Once you have the whole process mastered and you feel confident about your investment strategy, you can move onto other investment types if you so desire.

Step 3: Device a Research Strategy

Now you are getting into the investment strategy. Design a research strategy. Research is incredibly important for all types of investing. You need to know exactly what you are putting your money into and you need to know that it is a good buy.

When you study, you will also study about research. Once you know how to do it, you can make a strategy. Decide what kind of ratios, financial statement, and other information you will look for. Figure out how each stock, bond, or other investment will need to measure up before purchasing.

Step 4: Determine the Dollar Amount to Invest

Basically, the dollar amount you will invest will depend largely on what you can invest. Obviously, you can’t invest $10,000 a month if you are barely making $3,000 before taxes. Determine the exact dollar amount or the percentage of your income you will invest.

Try to give yourself a goal. Push yourself to invest more and more. If you think you can afford $100 a month, start with that and try to do $200 next month. The more you invest, the more you’ll make. Even a poor investment strategy will do well if you invest a lot.

Step 5: Build your Portfolio

Now it’s time to spend some money, but not in the way that will make you broke. Start buying securities and building your portfolio. After you’ve researched, you will know exactly what do buy. Buy as much of those securities as possible.

Build a strong portfolio. When you are researching, keep diversification in mind to minimize your risk and maximize your gains. Buy companies that show promise for growth or value increase in the future based on your research.

Step 6: Monitor your Portfolio

The beginning of your investment strategy is hardly the end. You will need to continue to monitor your portfolio and make changes as you go. Spend at least 1 hour per week per investment. For example, if you bought stock in 5 different companies, you should spend at least 5 hours per week researching that company.

As necessary, you will be buying and selling stock, or other securities. If you grow unsure about a corporation or you feel you’ve made the most on an investment you can, move on. Don’t lose money.

Most of all, continue studying and practicing your craft. Read all the books you can and take the information in slowly but steadily. Don’t automatically take all information you read or hear as perfect. Use it to help you along with your investment strategy.

Stock and Bond Trading as a Conservative Investment Strategy

It’s likely that either curiosity or skepticism led you to this article, and I would agree that, for most individual investors, trading is approached in a totally speculative manner. Stock trading, in its more popular forms (Day Trading, Swing Trading, Penny Stock Speculating, etc.) includes none of the elements that a conservative investment strategy would have at its very core: Little if any attention is given to the fundamental Quality of the equities selected. Any Diversification that exists in the portfolio is determined by chance alone and is, at best, a transient result of the selection guesswork. No attempt whatever is made to develop an increasing and dependable stream of Income. But stock trading by individual investors doesn’t deserve quite as bad a “rep” as it has earned. After all, its very foundation is Profit Taking, probably the most important (and possibly the most often neglected) of the activities required for successful investment portfolio management. Unfortunately for most non-professional equity traders, loss taking is a more common occurrence.

Bond, (and other Income Security) trading is generally avoided by most non-professional traders. Obviously, it takes more investment capital to establish positions in Corporate and Municipal Bonds, Real Estate, or Government Securities than it does in Equities, and the volatility that traders thrive upon is just not a standard feature of the mundane world of debt securities. Surprisingly, most investment advisors and stock brokers have not discovered that there is a more exciting approach to Income Investing that is actually safer for investors and less inflexible in the face of changing interest rate expectation scenarios. Certainly, Wall Street financial institutions pressure their representatives to push individual new issues and/or investment products, but I think that the Market Value fixation that stretches from Wall Street to Main Street is the real culprit. Income securities need to be “valued” for long-term income growth and traded with great pleasure… albeit much less frequently.

Consequently, most trading is done in an Equity only environment that, by its very nature, is too speculative for most mature (in whatever sense you choose) investors. But this is not the way it needs to be. Since stock prices are likely to remain volatile in the short run and cyclical in the long run, there will always be opportunities for profit taking. [Note that it is the combination of volatility, market accessibility, universal equity ownership, and confiscatory taxation that have made “Buy ‘n Hold” a tar pit Investment strategy.] Similarly, there are no rules against taking advantage of the cyclical nature of interest rate sensitive security prices. Trading is the world’s oldest form of commercial activity, and it is unfortunate that it is treated with such disrespect by our dysfunctional tax code. It is even more unfortunate that it is looked at askance by client attorneys and brokerage firm compliance officers… masters of hindsight that they are.

Trading does not have to be done quickly to be productive, and it doesn’t have to focus on higher risk securities to be profitable. And perhaps most importantly, it doesn’t have to avoid the interest rate sensitive income securities that are so important to the long-term success of any true investment portfolio. No matter how beaten up a speculative day trader becomes, whatever profit taking experience there has been is invaluable. Once a trader/speculator is weaned off the gambling mentality that brought him to the “shock market” in the first place, he can apply his trading skills to investing and to portfolio management. The transition from trader/speculator to trader/investor requires some education… education that cannot be obtained from product salespersons.

Step One is to gain an appreciation of the power of Asset Allocation using the principles of The Working Capital Model. Asset Allocation is the process of dividing the portfolio into two conceptual “buckets”. The first of these will contain Equity Securities, whose primary purpose is to produce growth in the form of Realized Capital Gains. The other bucket will contain various securities whose primary purpose is to produce some form of regular income… dividends, interest, rents, royalties, etc. The percentage allocated to each is a function of a short list of personal facts, concerns, goals, and objectives. The cost basis of the securities, absolutely not their constantly changing Market Values, must be used in all Asset Allocation calculations. Asset Allocation is a critical portfolio planning exercise that is: based on the purpose of the securities to be purchased, long term in nature, and never “rebalanced’ or altered due either to current market circumstances, hedging, or some form of market timing (which, of course, is impossible).

Market Values are used in the selection process that identifies trading candidates that will fill the buckets… cash from all income sources, by the way, is always “destined” for one bucket or the other, and may be held unused if no proper candidates exist. Selecting potential Equities must first be “fundamental”, then “technical”… i.e. based on the Quality of the security first, and the price second. My experience is that higher quality companies purchased at a 20% or more discount from the 52-week high, with a profit target of approximately 10% (realized as quickly as possible) is a very manageable approach. The proceeds find their way back into the “smart cash” pot for Asset Allocation according to formula. There will be times when “smart cash” grows quickly while the list of new trading candidates shrinks, but when trading candidates are all over the place, “smart cash” is replenished with a portion of every income dollar produced by both fully invested buckets! Thus, insistence upon some form of income from all securities owned makes enormous sense!

But what about trading the Income Bucket securities? Enter the Closed End Income Fund, in the form of a common stock, and in a surprising variety of income producing specialties ranging from Preferred Stocks to Oil Royalties, Treasury Securities to Municipal Bonds, and REITs to Mortgage Income. No more worries about liquidity and hidden markups. No more cash flow positioning or laddering of maturities. And best of all, no more calls of your highest yielding paper when interest rates fall. Instead, you are taking capital gains, compounding your yield, and paying your dues to the Equity Bucket. And when interest rates move back up… you’ll have the luxury of reducing your cost basis by adding additional shares. Of course its magic… that’s what we do here on Wall Street!