There are countless sophisticated investment strategies to try to better your investment results. But experience shows that your best investment strategy is to use plain common sense.
Devising an investment strategy that meets your own objectives is one of the first steps in planning your portfolio. Generally, a good strategy will help you avoid major mistakes, of course. But you must periodically review your strategy and adjust it as times change.
If you apply a little common sense to the business of investing, solving the ‘what’ and ‘when’ of buying and selling investments is apt to become easier than it may seem at first.
Here are common sense rules that pay
Investment wisdom holds that in bad times and good it’s important to exercise patience. The plodder, who methodically accumulates shares in high-quality stocks over the years, almost always does better in the long run than those who aim for quick profits.
Act on things as they are, rather than how you believe they might become—as billionaire Warren Buffett does. He has said that trying to anticipate future developments would have led him astray. In short, stress current value over predictions. After all, the latter can fail, especially if they’re based on rumours.
It’s best to develop the conscious habit of becoming more cautious as shares rise and approach their eventual peak. Curb your aggressiveness until after stock prices have had a big drop and show signs that they may begin rising again.
Remember that all returns on your investments are equally legitimate. In other words, you can spend dividends and interest as much as capital gains. Dividends and interest are often more reliable than capital gains as well.
Diversify to spread your risk
It’s best to diversify your investments as much as is prudently possible. Besides stocks and bonds you can invest in antiques, coins, stamps and anything else in which you have—or can acquire—expertise. This spreads your risk. It also gives you a broader range of choices in selecting bargains as they appear and as your cash flow permits.
Hard assets like antiques can retain their value. In the US it’s said “a penny saved is a penny earned”. In Argentina it’s said that “a penny spent is a penny saved”. At the start of a 10-year bout of inflation, 40,000 Argentine pesos could buy a house. Ten years later, 40,000 Argentine pesos could only buy a man’s neck tie.
You should always be on the lookout for signs that foreshadow a major shift in the direction of stock prices. For one thing, when just about everyone feels that stock prices are headed one way, they often go in the opposite direction.
Of course, it’s hard to sell when everyone else is buying, or vice-versa. But there are some fairly reliable signs that can help bolster your resolve.
Speculative stocks often fall just before the overall market peaks. Dot-com stocks, for instance, began to fall in March 2020, six months before the overall market peaked in September. A bottom, by contrast, is often marked by what’s called a ‘downside climax’: stock prices drop sharply, then rise sharply on heavy trading volume—all in the space of a day or two.
When investors begin to trade bank stocks heavily over the course of several weeks, often a major turn—either up or down—is near. That’s what happened in early 1982, just before the market began a long upward trend.
Since our stocks often follow those in the US, it helps to study markets in that country when you’re trying to figure out what will happen here.
The four-year rule has paid off many times
US stocks often give you a solid buying opportunity every four years, thanks in part to the way the US government times its intervention in the economy to enhance re-election prospects. According to this four-year rule, 2022 should offer a buying opportunity.
Good advice can help your investment success. But be careful when taking advice from brokers, insurance agents, or anyone else who may try to sell you something. Always seek a second opinion from an unbiased, knowledgeable source.
Remember that daily fluctuations mean little when you’re investing for the long term. Exercise common sense and you’ll prevent them from spoiling your carefully thought-out decisions.
This is an edited version of an article that was originally published for subscribers in the January 28, 2022, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •3/30/22 •