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分享Strategies for investing in the stock market
The primary message for people who are interested to invest in the stock market is that they should ignore market timing and buy stocks for the long term. This strategy is simple and yet effective because stocks give good returns over a long period of time. This article will highlight strategies on how to allocate their money which could prove to be useful for investors between savings and stocks.
The most simple strategy is the Buy-&-Hold strategy. One does not need to do anything no matter what happens after the initial investment is made. For example, you have $100 and you then decide to keep $60 in savings and use the remaining $40 to buy stocks. Whether the stock market goes up or down, you do not use your savings to buy more stocks or sell stocks to put money back into savings.
If you follow this strategy strictly, it gives you downside protection because your wealth will not fall below $60. At the same time, it still gives you unlimited upside potential because of the $40 that you have invested in stocks. Given that stocks in general will give you higher returns than savings in the long run, this is why many fund managers advise investors to put a significant portion of their wealth in stocks and hold on to them.
Another commonly mentioned strategy is the Constant Mix strategy. In this case, you maintain a constant percentage of your wealth in stocks. To use the same example, you initially put $60 in savings (60%) and $40 in stocks (40%). If the stock market falls by 20%, your initial $40 investment is now worth $32 and your wealth has dropped to $92, i.e. $60 in savings (65%) and $32 in stocks (35%). Note that your percentage in stocks has fallen from 40% to 35%. In order to maintain your initial 40%, you have to use your savings to buy more stocks. This strategy requires you to buy stocks when their prices fall and sell stocks when their prices rise. Put simply, it is a strategy that forces you to follow, the rule of 'buy low and sell high'.
While the Constant Mix strategy seems to be the best strategy to follow, the Buy-and-Hold strategy is better under certain situations. For example, the market is oscillating up or down, the Buy-and Hold strategy, rewards you better. Therefore, if you believe that the stock market is on a long-term uptrend, the Constant Mix strategy is not a good one to follow. However, the Constant Mix strategy is very useful in a flat but oscillating market. For example, you buy more stocks when the market drops and you sell them for profits when the prices recover. This strategy takes advantage of the up and down cycles in a market that is going nowhere.
The third strategy is the Constant Proportion strategy. Basically, the strategy requires the investor to maintain an exposure to stocks based on a multiple of the amount he is willing to risk. It follows a formula like this :
Dollars invested in stocks = m X(Present wealth - Floor)
where m >1
The floor is the level of wealth where the investor can not tolerate risky investment and is not willing to put any a cent in stocks. For example, the investor needs $60 (Floor) for retirement and is not willing to risk this amount in an investment. His present wealth is $100., Assume that m=2, he will invest 2X($100-60) or $80 in stocks and save $20. If the market drops by 10%, his stock investment will be worth $72 and his total wealth will be $92 ($72 stocks and $20 savings). Based on the formula, his stock investment should be reduced to 2X($92-$60)or $64. Thus, he has to sell $8 worth of stocks and put the money into savings.
In essence, you sell stocks as they fall and buy stocks as they rise (many like to put it as 'buy high and sell higher'). While this contradicts the convention of 'buy low and sell high', it is a strategy that is very suitable for trending market. The strategy also gives downside protection because when the investor's wealth drops to the floor, it requires him to keep all his money in savings.
Because it forces investors to get out of stocks as the market falls, investors enjoy some downside protection. The
Constant Mix strategy is a form of 'buy low/sell high' strategy which is good for a market caught in a trading range. As the strategy recommends buying more stocks as they fall, there is no downside protection for investors. Unfortunately, many investors do not have any idea which part of the market cycle they are in. Thus the in-between 'Buy & Hold' strategy seems the most appropriate and simple. It is also the one with the lowest transaction costs.
There is no reason to believe that any of the strategies is best without considering the individual's requirements. For an investor who needs a minimum sum of savings to meet his mortgage payment next month, it will be inappropriate to ask him to invest more of his savings in a bear market, although the strategy might prove profitable in a year's time.
It is however not easy to implement any of these strategies. The money that is supposed to invest in stocks should be put into a diversified basket of good quality stocks. This is not possible for an investor with only $1,000 to invest or one who does not have any expertise in stock investments. The alternative is to invest in the stock market through unit trusts. With unit trusts, the investor can gain exposure to the stock market of his choice without going through the hassle of researching and constructing a diversified portfolio of stocks.
The most simple strategy is the Buy-&-Hold strategy. One does not need to do anything no matter what happens after the initial investment is made. For example, you have $100 and you then decide to keep $60 in savings and use the remaining $40 to buy stocks. Whether the stock market goes up or down, you do not use your savings to buy more stocks or sell stocks to put money back into savings.
If you follow this strategy strictly, it gives you downside protection because your wealth will not fall below $60. At the same time, it still gives you unlimited upside potential because of the $40 that you have invested in stocks. Given that stocks in general will give you higher returns than savings in the long run, this is why many fund managers advise investors to put a significant portion of their wealth in stocks and hold on to them.
Another commonly mentioned strategy is the Constant Mix strategy. In this case, you maintain a constant percentage of your wealth in stocks. To use the same example, you initially put $60 in savings (60%) and $40 in stocks (40%). If the stock market falls by 20%, your initial $40 investment is now worth $32 and your wealth has dropped to $92, i.e. $60 in savings (65%) and $32 in stocks (35%). Note that your percentage in stocks has fallen from 40% to 35%. In order to maintain your initial 40%, you have to use your savings to buy more stocks. This strategy requires you to buy stocks when their prices fall and sell stocks when their prices rise. Put simply, it is a strategy that forces you to follow, the rule of 'buy low and sell high'.
While the Constant Mix strategy seems to be the best strategy to follow, the Buy-and-Hold strategy is better under certain situations. For example, the market is oscillating up or down, the Buy-and Hold strategy, rewards you better. Therefore, if you believe that the stock market is on a long-term uptrend, the Constant Mix strategy is not a good one to follow. However, the Constant Mix strategy is very useful in a flat but oscillating market. For example, you buy more stocks when the market drops and you sell them for profits when the prices recover. This strategy takes advantage of the up and down cycles in a market that is going nowhere.
The third strategy is the Constant Proportion strategy. Basically, the strategy requires the investor to maintain an exposure to stocks based on a multiple of the amount he is willing to risk. It follows a formula like this :
Dollars invested in stocks = m X(Present wealth - Floor)
where m >1
The floor is the level of wealth where the investor can not tolerate risky investment and is not willing to put any a cent in stocks. For example, the investor needs $60 (Floor) for retirement and is not willing to risk this amount in an investment. His present wealth is $100., Assume that m=2, he will invest 2X($100-60) or $80 in stocks and save $20. If the market drops by 10%, his stock investment will be worth $72 and his total wealth will be $92 ($72 stocks and $20 savings). Based on the formula, his stock investment should be reduced to 2X($92-$60)or $64. Thus, he has to sell $8 worth of stocks and put the money into savings.
In essence, you sell stocks as they fall and buy stocks as they rise (many like to put it as 'buy high and sell higher'). While this contradicts the convention of 'buy low and sell high', it is a strategy that is very suitable for trending market. The strategy also gives downside protection because when the investor's wealth drops to the floor, it requires him to keep all his money in savings.
Because it forces investors to get out of stocks as the market falls, investors enjoy some downside protection. The
Constant Mix strategy is a form of 'buy low/sell high' strategy which is good for a market caught in a trading range. As the strategy recommends buying more stocks as they fall, there is no downside protection for investors. Unfortunately, many investors do not have any idea which part of the market cycle they are in. Thus the in-between 'Buy & Hold' strategy seems the most appropriate and simple. It is also the one with the lowest transaction costs.
There is no reason to believe that any of the strategies is best without considering the individual's requirements. For an investor who needs a minimum sum of savings to meet his mortgage payment next month, it will be inappropriate to ask him to invest more of his savings in a bear market, although the strategy might prove profitable in a year's time.
It is however not easy to implement any of these strategies. The money that is supposed to invest in stocks should be put into a diversified basket of good quality stocks. This is not possible for an investor with only $1,000 to invest or one who does not have any expertise in stock investments. The alternative is to invest in the stock market through unit trusts. With unit trusts, the investor can gain exposure to the stock market of his choice without going through the hassle of researching and constructing a diversified portfolio of stocks.
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