At first glance the best investment strategy in late 2007 was to sell every stock investment you held; and the best strategy in early 2009 was to put 100% of your investment portfolio into stocks. The result would have been no investment losses in 2008 and big profits in 2009 and early 2010. Your odds of doing this without a crystal ball were about zero. But with a simple and sound investment strategy you can make the best of any market situation.
The best investment strategy is not a formula that tells you when to dump one investment asset and when to buy and hold another on a short term basis. Trying to time the markets is speculation and beyond the scope of sensible investing for the average investor. What you need is a longer-term sound plan that only requires minor adjustments over time. Let’s look at the key elements to putting together your best investment strategy for long term profits with less risk.
You must take risk into consideration when judging the results of, or putting together any investment strategy. Our crystal ball scenario went from an asset allocation of zero for stock investment to 100%. Not only is this strategy very risky, it is also short-sighted. It begs the question: what do you do in 2010 and beyond? When do you cut your stock investment and run, and where do you go next? Overstay your welcome and your stock investment profits could evaporate in a few months, because the truth of the matter is that you have no long term investment strategy at all.
As an average investor, taking risk without a plan is not the way to play the investment game. It’s your money and it’s important to you. View putting together your best investment strategy like this: you want to earn in the neighborhood of 10% a year over the long term taking only a moderate amount of risk. This means that you will likely never make 50% or more in a year because you have no crystal ball. It also means that you have a real good chance of avoiding big losses that can upset your future financial plans (like a secure retirement) as well.
Every good investment strategy focuses on asset allocation. This means that you allocate your money by diversifying and spreading it across all four, or at least three of the asset classes. Starting with the safest these are: cash equivalents, bonds, stocks, and perhaps other investments called alternative investments (like real estate, foreign or international securities, and gold). The simplest and best way for you to do this is through mutual funds that invest in each of these areas: money market, bond, stock, and specialty funds, respectively.
For example, if you want relatively low risk and simplicity you might allocate 1/3 each to a money market fund, a bond fund, and a stock fund. At the beginning of each year you review your investment portfolio to make sure your asset allocation is on track. If, for example, your stock investment has grown from 33% to 40% of your to total investment value, move money from your stock fund to the other two to make them all equal again. By doing this you are taking money off the table from your riskier stock investment when the market gets pricey, and adding money to stocks when prices are lower. In this way you have lower risk, no need for a crystal ball, and you know exactly what you are going to do each and every new year.
If you feel the need to keep it simple, do so as in our example above. If you want to take the best investment strategy to the next level include international stock funds and specialty equity funds like real estate and gold funds. The added advantage here is that in the past these alternative investments have proven to have the potential to offset losses when stock prices in general are falling. In short, they offer even more diversification to your asset allocation.