Good morning! Today Troy continues about the investing for beginners series. You can check the previous posts about What are stocks and how to value them, How does Currency Trading Work, How are Currencies Traded, Investing in Commodities, What Fundamentals Affect Commodity Prices, What are ETF’s, What are Options, How are Options’ Prices Structured
Part 1 of this Investing for Beginners series is officially over – we’ve covered all the basic terminology. In Part 2 of this series, we’re going to be looking at the different investment strategies (and how each strategy works). Here’s a quick breakdown.
- Buy and hold (the right way to do it – not the conventional way)
- Secular investing (what some people might call “fundamental investing”)
- Trend following
- Contrarian investing
- Discretionary investing (what some people might call “trading”. This term is actually a misnomer. I’ll explain why in later posts).
- Short term trading.
As you can see, there is a pattern in this breakdown. The strategies go from longer term (eg. 20 year investment cycles) to shorter term (eg 5 months investment cycles). I’ll explain each of these six strategies in detail. However, in this post I’m going to explain exactly what investment strategy is right for you. But before I do that, let me tell you a little story.
There was once a guy called John Smith, born circa 1975. By the late 1990s, John had just graduated, had a serious girlfriend, got a job, wanted to settle down, and needed some extra cash (hey – no one ever said that relationships came cheap). What year was this? 1998, the top of the hot-dot-com (internet bubble)! He starts off as a day trader, because “he wants to make some extra money on the side”. The tech bubble bursts in 2000, and John says “I don’t want to be a day trader any more. I want to be a long term investor”. 2008 comes along, and John gets his head handed to him again in the financial markets. Seeing his horrific losses, John says to himself “I’ll be a buy and hold investor, just like Warren Buffett. I’ll hold onto my investments forever”.
I find this story to be very amusing, because it describes the exact story about how most investors chose their investment strategies – their external circumstances (aka market conditions) make them choose their strategy. Please don’t do that.
First and foremost – your personality is what determines your investment strategy. This is a pretty simple concept actually. There are 2 key aspects of your personality that are important here:
- Your speed.
- Your stomache.
Some people are slow. I don’t mean that to offend anyone – they just are (I remember my Gr. 3 teacher asking one of my peers “Gabriel, do you have any gear other than Slow?”). In fact, being slow isn’t a disadvantage when it comes to investing (slow is synonymous with patient). There are two types of people: fast people and slow people. Fast people need thrill and excitement in their life. They just can’t sit on their butts and watch money slowly come in. They have to feel as if they’re doing something all the time. For these people, buy and hold definitely will not work. Trading is suitable to them – if you can’t even hold onto an investment for a year, how are you supposed to “buy and hold it” for 20 years? Impossible!
Some people are risk-takers, while others like to avoid risk. Personally, I admire a life like Steve Jobs’ – a roller coaster. I can’t stand low volatility in the markets. I need a heavily volatile market to remain comfortable. Your ability to take risk and withstand volatility (how much the market fluctuates) will determine what investment strategy is right for you.
I get it – life is busy, maybe you’ve got the young family, 2 kids, a-hole of a boss. Your time will impact your investment strategy. That’s a no-brainer. The less time you have, the longer term of an investment strategy you’ll need to take.
But here’s what I want you to remember. Below a certain level of commitment (eg 2 hours a week), you shouldn’t be investing. Investing – like any other occupation, career, part time job, etc – is all about commitment. If you can’t even commit an hour each week to learning about investing and keeping abreast of the financial markets, you shouldn’t be investing! Stick your money into a bond or a bank or something!
The financial markets are a zero sum game. For every dollar made there’s a dollar lost. If you’re the house league guy playing against a triple A hockey player, can you win? Of course not! If you don’t even have a decent amount of commitment to investing, all you’re doing is giving money to guys like Warren Buffett who will make money!
Last but not least, the amount of money you have will influence what type of investment strategy you should pursue. If you just have $20,000 I’m sorry to break it to you. Buy and hold just won’t work. A person with $1 million only needs to make 10% a year to make $100k, while a person with $100k will need to make 100% a year to make $100k.
This being said, it’s pretty obvious what I’m hinting at – the less money you have (“startup” capital), the more actively you’ll need to invest and pursue superior investment returns.
Over the past few years, I have been a “stock picker” – short term investing I guess. I’ve actually beaten the market over the past 3 years with my choices. However, I have come to the conclusion that the amount I was beating the market by just simply wasn’t worth my time. My income per hour was dreadful. Instead, I’ve moved to more passive investments (index tracker ETFs) and am investing the time I’ve saved elsewhere to earn additional income at a better hourly rate.
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I’m glad to hear that. You can only outsmart the market for so long before you get burned. B&H with index funds is the only way to go.
I completely disagree with the author on the amount of time required also. You can easily get great returns in-line with the global market while reducing risk with about 30 minutes a month or less time commitment…
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