The Strengths & Pitfalls Of Investment Strategies
Without a disciplined structured investment plan, and the commitment to stick with it through thick and thin , it is virtually impossible to achieve any long term investment success. Nearly all legitimate investment plans rely on the following four strategies (or hybrid combinations of them), 1) Buy & Hold 2) Market Timing 3) Dollar Cost Averaging and 4) Asset Allocation. Each of these has its strengths, but like all things in life, has a drawback that will test your investment mettle and discipline. Here is a review for each...
"Buy & Hold"- It is simple to do and will work over the long haul for a large diversified holding of stocks. Historically the market has returned about 12% since 1926. The problem is that this 12% was not achieved in a regular and consistent manner! The buy and holder must deal with extremely long periods of time that he will be upside down on his investment. A period of 25 years was necessary to get to breakeven after 1929, and a period of 16 years was required to get to breakeven after 1966. It may be 20 years before we again see new highs on the Nasdaq. Gold investors are currently waiting at about 37% of the value of their $800 an ounce purchase in 1979 here 24 years later. If you happen to possess immortality, then buy and hold is the way to go!
"Market Timing"- Systematic mathematical timing reduces risk, and in the case of very volatile assets, can increase return. It requires daily scrutiny and extreme discipline. Most investors do not have the fortitude or interest to be this vigilant. The Lussenheide Investment Warrior believes in and practices market timing, and as a 25 year veteran of doing such, here are the biggest obstacles to sticking with this strategy that I have faced. You....
|Must be willing to sell at a loss
||Must be willing to buy at a price above where you sold
||Must be willing to buy when things look terrible and
the "sky is falling"
||Must be willing to sell when things look great and you
have grown accustom to a large monthly rate of return|
"Asset Allocation"-By adding many different lower correlating asset classes, you reduce risk and can enhance return especially when one is in the consumption/distribution phase of these investments. To incorporate this strategy properly, you must periodically rebalance your holdings to the set percentages you have for each asset class. This is hard to do, as it requires you to sell an asset class that has done well, and then buy more of another asset class that has done poorly. Historically this has proven itself as profitable, but goes very contrary to "conventional wisdom" and apparent common sense. This program requires discipline and a faith in the unknown.
"Dollar Cost Averaging"- By purchasing investments on a regular periodic basis, one can reduce the overall average price paid for shares, especially for those that experience occasional downturns. The strategy does not allow for exceptions to the rule and must be adhered to religiously to be effective. The difficulty comes with the counter intuitive discipline of having to buy into an investment as it is going down. This program requires real guts to do the exact opposite of what your stomach tells you to do!
The conclusion of the matter is that there is always a price to be paid in investing! Choose your poison carefully , but once you do, you must stick with your program long enough to make it work. The time horizon for these strategies is 15 years or longer. The strategy for fools is to constantly switch between disciplines whenever it seems like "yours" is not working and "others" are. Inevitably you will always be a day late and a dollar short! Remember our mantra....
NOW MORE THAN EVER, REMEMBER AND COMMIT TO STRATEGY, PATIENCE, & DISCIPLINE!
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The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. This document is prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.
The Lussenheide Investment Warrior Report does not advocate trading futures or options. Any mention of commodity futures contracts or options contracts and/or prices in this publication is for illustrative purposes only. This is not an endorsement or recommendation of any commodity futures market nor in margin trading. This is not an endorsement or recommendation of any option market. The risk of loss when trading futures and options is substantial. You can lose more than your original investment.
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