Money Matters: Becoming savvy on investment strategy pros and cons
There are many approaches to analyzing and deciding on investments, such as stocks and bonds.
Some believe it is almost impossible to beat the market indexes by selecting stocks — and some studies tend to confirm this.
These “efficient market” proponents just buy and hold the broad market indexes or a basket of diversified investments for a long-term strategy.
Others look at a “top down” approach, which analyzes the broad economic factors as a whole, and then select equities based on what the overall macro economy is doing.
A “bottom up” approach looks at individual company fundamentals, such as balance sheets, income statements and product offerings, and then selecting stocks based on company-specific predictions.
The question asked here is, how is the company doing and what are its prospects in the near- and far-term future?
“Sector rotation” aims to buy and sell stocks of companies that are going in or out of favor, based on a broad view of the economy and what is and isn’t in demand at a certain point in time — and also what will be in the future. This type of analysis can be industry-specific or even geographically based.
Modern Portfolio Theory (MPT) compares the risk of an investment against its potential return, and then assumes a wide diversification over many asset classes may minimize risk and obtain the greatest return over a prolonged period of time.
There are fixed income investors that concentrate on interest-bearing assets such as bonds and other debt instruments, which may minimize the ups and downs of typical equities. Investors in fixed income securities look for steady income and stability more than capital growth.
“Technical” analysts compare visual stock charts, price movements, stock volume, resistance and support levels, moving averages and other “trading tendencies and anomalies” and compare them to historical data, believing past trading tendencies will repeat themselves in one form or another.
“Dollar cost averaging”* is a strategy where the investor buys equities over a long period of time, regardless of the price. The key here is to keep investing over time. As stock prices move up, you purchase less shares due to the higher price, and if stock prices move down, more shares can be afforded.
Adding a certain amount each time period or using Dividend Reinvestment Plans (DRIPS) to buy more stock over time (in lieu of taking the cash dividend) are the methods usually used to deploy this strategy.
No matter what method you use, be aware of all the techniques and strategies and considering the benefits and drawbacks of each. Doing so can go a long way toward improving your odds at success.
This article expresses the opinions of Marc Cuniberti. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. He can be contacted at MKB Financial Services in Auburn at 530-823-2792. MKB Financial Services and Cambridge are not affiliated.
*Investing regular amounts steadily over time (*dollar-cost averaging) may lower your average per-share cost. Periodic investment programs cannot guarantee profit or protect against loss in a declining market. Dollar-cost averaging is a long-term strategy involving continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your financial ability to continue to invest during periods of fluctuating price levels. Investing involves risk of loss, including total loss of principal. Please always consult your financial advisor prior to making any investment decisions.
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