More and more investors are realising the dangers of not having an active investment strategy. So many investment and retirements accounts were wiped out by the stock market crashes of 1987, 2010 and 2011, and even 90% of mutual funds (which are supposed to be well managed, safe investment vehicles) were badly affected by the market downturns. The average inflation rate in the USA in 2012 is 2.3%, but the best savings account yields, at most, 1% returns. This means that you are losing money when you simply place your investments in a simple savings account, although not as much as if you had employed a ‘buy and hold’ strategy in the stock market. Even investing in ‘safe, blue chip’ high dividend stocks can have sting in the tail, especially considering that dividend earnings may subject to taxation. So, how can you develop your own investment plan?
Steps to a Your Own Investing Plan
Work actively with an investment broker (not a fund manager) – listen to his recommendations, but actively do your own research. Remember that brokers often receive incentives to ‘pump’ certain stocks, so it pays to get your own information. Find out how to understand fundamental details of a company, and learn to understand important terms such as PE ratio. Have a list of questions to ask your broker, and never allow him to push you into a stock that you are not completely comfortable with.
Open your own investment account with an online broker – this is a great way to manage your own portfolio, and the brokerage fees are the cheapest. However, it is really important that you pay attention to diversification. Spread your investment over several sectors and different investment vehicles, so that if one crashes, you are protected in other sectors. Put some money in growth funds, some in growth stocks, some in high dividend stocks, some in REITs and some in safe bonds or treasuries.
Build up an investment plan, which you have paper traded and refined. This plan is very important, must be well thought out, and must have different rules for different strategies. Above all, stick with your plan! Do not trade with your emotions!
Some Investment Strategies to Consider
Momentum Trading – learn the simple skill of identifying a trend in the market, and use a swing trading strategy, or a momentum strategy, to get the most out of the market direction. You may consider using DITM (Deep-in-the-money) option strategies in order to give your investment some safe leverage, without increasing your risk.
Use Option Strategies to reduce the cost of your investment, and to lower your risk of loss. A covered call strategy is perfect for this, in that you can protect your investment from heavy losses, and simultaneously recover some of your investment over time.
Option strategies – there are relatively simple, lower risk option strategies that allow you to take advantage of market trends without exposing your funds to danger. For examples, selling credit spreads allows you to take advantage of both upwards and downwards trend in a market.