Monday, March 28, 2011

Following An Investing Strategy

Playing The Odds
Would you buy a ticket in a draw that offered you one chance in twenty of winning?  As draws go, those would be fairly good odds.  If the draw was for a worthy cause, we would likely be even more inclined to buy a ticket, provided it was not incredibly expensive.  Would you still buy that same ticket if I told you I owned all of the other 19 tickets?  Most of us would not, no matter what the price.

The odds can be in our favour, or not, but that is not going to be the only thing that determines what choice we make.  Our decision is based more on our perception of the chances of winning.  This is one of the reasons it has been said that the markets can remain irrational longer than most people can remain solvent.  What does this mean to investors like you and I?

The Need For A Strategy
The first thing is we need to admit to ourselves that we are human, which means sometimes our decision making process is flawed.  Knowing that, we need to find a strategy that takes a certain amount of the emotion out of our buying and selling decisions.  This strategy needs to be one with which we are comfortable, and one that works over a longer period of time.  Not having a strategy, or not having a valid strategy (no, using horoscopes to pick stocks is not a good idea) is one of the single largest reasons people fail to do well in the stock markets.  For that matter, it is one of the single largest reasons people fail to be successful in life, itself!

Notice I described it as a plan that works for you.  There are almost as many strategies out there as there are people.  Look for a strategy that meets your personal objectives.  If you have enough money, and interest returns are sufficient, a fixed income strategy could be best.  However, few of us are that financially well off. 

Also, the level of risk associated with any strategy needs to be taken into account.  Measuring risk can get a little tricky.  For one thing, the better we understand the cause of the risk involved, the more tolerant we can become of that risk.  Risk exists in any portfolio.  Risk that we have some control over can, at least, be partially mitigated.

Let's face it.  There is risk associated with driving a car on the highway.  Mile for mile, it is much more risky than flying the same number of miles.  Yet, we still accept the risks and drive on the highway anyway, even though there may be a plane that would get us to our destination.

Using A Strategy
We need to develop a strategy that keeps the risk within our tolerance level, and helps keep us successfully on track.  Then, we need to test it.  If we develop the discipline to follow our winning strategy, we will be ahead of at least eighty percent of all other retail investors.

Do you currently have and follow a particular investment strategy?

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