Basic Tenets .....
- Stock markets go through cycles, timing counts;
- Stock prices are not always based on fundamentals or facts, consider market sentiment;
- Businesses go bankrupt, stocks of bankrupt businesses are worthless, fundamentals do count for something;
- Serious money is made and lost trading stocks; vested interests operate within the market.
- Self interest and self promotion are human traits, do your own research and make your own decisions;
- Decisions are influenced by emotion; apply logic;
- No one is correct 100% of the time; consider worst case scenarios.
- Money is valuable; treat it with respect.
- Earning money requires effort; expecting to make money without effort is gambling.
Buy and Hold
The Buy and Hold strategy is based on applying Fundamental Analysis to identify and buy stocks currently priced below Fair Value. This is a long term strategy and requires limited maintenance.
This strategy depends upon the stock providing the required return over a long term period.
It does not benefit from market cycles.
Dollar Cost Averaging
This is an extension of the Buy and Hold strategy where a set value investment is made over time.
It does provide some benefit from market cycles as the average cost of stocks held tends to decrease during bear markets (along with your investment).
A Stop Loss is setting a sell price at some level below the buy price of a stock. This is often considered as an absolute necessity for any stock investment.
This limits potential losses and can also be applied to lock in profits by increasing the Stop Loss sell price as the stock price increases. The setting of the Stop Loss should consider underlying trends.
Diversification reduces risk by averaging out returns. The average high is less than the highest high and the average low is higher than the lowest low. Simply holding a number of different stocks reduces the risk from individual stock performance but it still exposes you to the same level of overall market risk. There is also an argument that over diversification has a negative impact by diluting investment focus.
Economic cycles result in different market sectors performing better at different stages of the cycle. This suggests that focusing on different market sectors at different stages of the economic and market cycle would improve returns.
In a very basic sense a sector rotational strategy involves portfolio reweighing inline with sectors of highest relative performance.
|Economy Stage||Stock Market Stage||Sectors of Highest Relative Performance|
|Rising||Top||Consumer Discretionary, Property|
|Top||Falling||Materials and Resources|
|Falling||Bottom||Health, Consumer Stables|
Disregarding the economic and market cycles and simply focusing on the sector cycle provides a leading indicator for each sector.
Finance >> Consumer Discretionary, Property >> Materials and Resources >> Health, Consumer Stables >> Finance >> and so it goes .....
|When this Sector Peaks||Move into this Sector|
|Materials and Resources||Health, Consumer Stables|
|Health, Consumer Stables||Finance|
|Finance||Consumer Discretionary, Property|
|Consumer Discretionary, Property||Materials and Resources|