Whether you are starting to invest or considering changing what you are currently doing, you must decide which of the three investment strategies can best reach your goals. It doesn’t matter if you make your own investment decisions or give you money to someone else to manage it; there are only three investment strategies to choose from. You must choose between relying on market timing, security selection or asset class allocation as your investment strategy. To decide which you need to be able to identify each strategy and understand its benefits and downsides.
Market timing depends on the timing of when an investment is made. The investment could be in a particular security, asset class or sector, but the decision to invest or not depends on when. Market timing boils down to betting on the direction a market will move in a certain time frame.
Security selection chooses what to invest in. With security selection the direction of the market doesn’t matter because you’re always invested. The decision is what is going to go up the most or down the least. You want to pick the best investment between different securities, asset classes, or sectors.
Asset class allocation determines how your money gets spread between different asset classes to best diversify your portfolio. Asset classes are different types of investments categorized in terms of risk, reward and income characteristics. For example, bonds, stocks, gold and real estate represent different asset classes. With asset class allocation you want to hold a group of asset classes whose prices move up over time, but go up and down at different times from each other.
Once you’ve identify the investment strategy being used you need to understand the unique benefits and downsides of each.
Market timing and security selection can provide exceptional returns, easily capable of beating the market by double digits. However, both require four correct decisions to be consistently profitable. You need to correctly decide what to sell, when to sell it, what to buy and when to buy it. Just to break even, you need to be correct on all four decisions more then 50% of the time to cover your losses, commissions and taxes. That means you have to be right on each of the four decisions more then 80% of the time. Market prices are the result of millions of people buying and selling based on news, their unique needs and their perception of what others will do. Because nobody can know or be right about these immeasurable variables consistently market timing and security selection are a losing game for most investors. Unfortunately, the other side of the potential for beating the market by double digits is the more likely result of trailing the market by double digits.
With asset class allocation you don’t pick what will go up more, down less or when. What you do is select asset classes that go up over the long run, but over the short run go up and down at different times. This provides the maximum benefits of diversification. Diversification on this level means you can reduce risk and which increases returns. Asset class allocation minimizes losses and builds wealth over time. Asset class allocation will not outperform the market by double digits. However, the other side that is, asset allocation prevents big losses, leaves you in a position to recoup losses faster then the market and this provides higher gains with less risk over the long run.
By: Seth Myers
About the Author:
Market timing depends on the timing of when an investment is made. The investment could be in a particular security, asset class or sector, but the decision to invest or not depends on when. Market timing boils down to betting on the direction a market will move in a certain time frame.
Security selection chooses what to invest in. With security selection the direction of the market doesn’t matter because you’re always invested. The decision is what is going to go up the most or down the least. You want to pick the best investment between different securities, asset classes, or sectors.
Asset class allocation determines how your money gets spread between different asset classes to best diversify your portfolio. Asset classes are different types of investments categorized in terms of risk, reward and income characteristics. For example, bonds, stocks, gold and real estate represent different asset classes. With asset class allocation you want to hold a group of asset classes whose prices move up over time, but go up and down at different times from each other.
Once you’ve identify the investment strategy being used you need to understand the unique benefits and downsides of each.
Market timing and security selection can provide exceptional returns, easily capable of beating the market by double digits. However, both require four correct decisions to be consistently profitable. You need to correctly decide what to sell, when to sell it, what to buy and when to buy it. Just to break even, you need to be correct on all four decisions more then 50% of the time to cover your losses, commissions and taxes. That means you have to be right on each of the four decisions more then 80% of the time. Market prices are the result of millions of people buying and selling based on news, their unique needs and their perception of what others will do. Because nobody can know or be right about these immeasurable variables consistently market timing and security selection are a losing game for most investors. Unfortunately, the other side of the potential for beating the market by double digits is the more likely result of trailing the market by double digits.
With asset class allocation you don’t pick what will go up more, down less or when. What you do is select asset classes that go up over the long run, but over the short run go up and down at different times. This provides the maximum benefits of diversification. Diversification on this level means you can reduce risk and which increases returns. Asset class allocation minimizes losses and builds wealth over time. Asset class allocation will not outperform the market by double digits. However, the other side that is, asset allocation prevents big losses, leaves you in a position to recoup losses faster then the market and this provides higher gains with less risk over the long run.
By: Seth Myers
About the Author:
Seth Myers, Investment Advisor Rep and Founder of IMYERS a Fiduciary Investment Adivsory Firm Specializing in the optimization of investment portfolios through Diversified Asset Class Allocations (DACA’s) and 401k compliance with ERISA guidelines. Visit us at http://www.investingmyers.com