There are countless sophisticated strategies you can use to achieve better investment results. But the best investment strategy is to use plain common sense and patience.
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 mistakes; a poor strategy can result in errors that can be disastrous to your financial health.
But you cannot rely on any one investment strategy. You must constantly 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 at first seem.
Develop good habits
One piece of investment wisdom that holds true in bad times and good is that it’s important to exercise patience. The plodder, who methodically accumulates shares in blue chip 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. That is, stress current value over predictions. After all, the latter can fail—especially if they are based on rumours.
It’s best to develop the conscious habit of becoming more cautious as share prices 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 once again.
Remember that all returns on investments deserve a place in most portfolios. In other words, while capital gains can increase your purchasing power, so too can dividends, and sometimes interest. Dividend stocks and interest income are often more reliable than capital gains as well.
It pays to diversify
Common sense dictates that it’s best to diversify your investments as much as is prudently possible. In addition to 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 own cash flow permits.
In the stock market, you must always be on the lookout for signs that foreshadow a major shift in the direction of stock prices. What should you watch for? 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 difficult to sell when everyone else is buying, or vice versa. But there are some fairly reliable signs that can help bolster your resolve.
Often aggressive stocks—junior resource and industrial stocks, for instance—will begin to drop just before the overall market peaks. A bottom, on the other hand, is often characterized by what analysts refer to as a ‘downside climax’: stock prices drop sharply, then rise sharply on heavy trading volume—often 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.
Watch US trends
Since our stock prices tend to follow those in the US, it helps to study markets in that country when you are trying to figure out what will happen here.
Good advice can help you achieve long-term investment success. But remember this: be cautious when listening to the advice of bankers, analysts, fund or insurance agents, or anyone else who is in a position to sell you something (other than advice). Always seek a second opinion from an unbiased, knowledgeable source. Too many investors ignore this sensible safeguard—to their sorrow.
This is an edited version of an article that was originally published for subscribers in the January 14, 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 •4/17/22 •