There are many investors and websites with trading systems designed to advocate that you can beat the market by timing your stock purchases and exits. That is the theory with day traders. They feel that by looking at the historical movements of a stock and where certain technical indicators are, the entry and exit points will be identified. To a small extent, this is possible but not for the long-term growth expectations of making a profit on stock investments.

The thing is that common stocks have volatile returns. That is why they have potential for better returns. Historically investors have suffered negative annual returns 27% of the time. If someone had a crystal ball and could without error predict the turnings of the stock market, they would be rich from their investments and the selling of advice. The truth is that no one has a crystal ball.

Roger C Gibson in his book “Asset Allocation” gives an example. Say in 1925 you found a person who had a crystal ball, so to speak. That is they could predict accurately what the stock market was going to do the next year. You follow their advice and at the end of 1926 your $1.00 investment grew to $1.12. Year after year you follow this market timers advice and never have any down y ears. By the end of 1998 your investment would be worth over $20 million instead of the actual best –performing investment alternative. Small company stocks during the same period had an ending value of $5117.

With this example, Mr. Gibson tried to point out that no one is able to predict accurately every Bull or Bear market. A great investment axiom is “hind sight is 20/20”. Meaning that it is easy to predict what the market or a particular stock is going to do after the fact. It is the before the fact decisions that are difficult.

Trinity Investment Management Corporation analyzed the nine peak to peak cycles that have occurred since 1946. They found that there were about 1.7 times as many up months as down months during this period. The average bull markets is up 104.8 percent versus the average bear market of -28 percent. Bull markets lasted nearly three times as long as bear markets and the shocker is that even in bear markets, there were on average about 3 – 4 up months out of 10 months.

A study by Robert H Jeffrey concluded “ No one can predict the market’s ups and downs over a long period, and the risks of trying outweigh the rewards”. He went on and commented “The rationale for being a full-time equity investor is not that there are more positive real return periods than negative ones in most time frames, but rather that most of the “positive action” is compressed into just a few periods, which tend to follow particularly adverse times for stocks”.

In another study Jess S Chua and Richard S. Woodward concluded “Overall, the results show that it is more important to correctly forecast bull markets than bear markets. If the investor has only a 50 percent chance of correctly forecasting bull markets, then he should not practice market timing at all. His average return will be less than that of a buy-and-hold strategy even if he can forecast bear markets perfectly”.

William F. Sharpe concluded that “a manager who attempts to time the market must be right roughly three times out of four, merely to match the overall performance of those competitors who don’t. If he is right less often his relative performance will be inferior”.

The conclusion then is the long term investor, which is what we should all be, should enter for the long run. Establish a good strong diversified portfolio and stick with it through the ups and downs.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

When determining your investment portfolio strategy and long term goals, it is important to know a little bit about the different asset classes you can choose to invest in. Establishing a portfolio which invests in several different asset classes will make your portfolio more diversified. This means that your risk is spread over several different options. If one asset class goes down, another asset class may be going up.

An asset class is a grouping of similar investments or securities that tend to move together. In a broad sense there are only a few asset classes while there are different investment categories within the broad investment classes. The three main investment classes are Cash, Fixed Income and Equities. A fourth special asset class can also be considered. This class includes commodities and private equity which can include hedge funds, venture capital funds and leveraged buyouts. Real estate is also considered an asset class which is not a part of the stock market investment pool.

Within the cash asset class, you can include money market, certificates of deposits, institutional savings plans, The Fixed Income class can include U.S. Treasuries, Foreign Bonds, municipal bonds, corporate bonds and asset-backed securities. The Equity asset class can include domestic equities including stocks, developed market equities which are stock investments in Europe and the Pacific Rim, Emerging Market equities which are stock investments in developing countries such as Brazil, China and India. Another category in the Equity class would be real estate investment trusts or REIT’s.

There are different thought process from investment advisors as to how many of the asset class categories an investor should be invested in to properly diversify their portfolio. John Bogle, the founder of Vanguard, feels that two classes are sufficient. These classes would be the U.S. Bond market index and the total U.S. equity market index.

David Swenson who runs the Yale endowment feels that 6 major asset classes (domestic equity, foreign developed securities, emerging markets, REIT’s, U.S. Treasury Bonds, Treasury inflation protected bonds) would be all you would need.

William Bernstein, an asset allocation author, feels you should have over 20 different asset classes.

It is hard to know exactly but it is a given that to be properly diversified, you should have around 4 – 8 different categories across the three major asset classes. Investing in the special asset class is speculation. A review of the historical risks and returns along with some advice from an investment advisor would help to determine the type of portfolio you should develop.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Using mutual funds to diversify your portfolio is perhaps the easiest way to invest. You can pick the fund’s that fit your desired risk and preferences and instantly be able to be invested in hundreds of stocks within that mutual fund family. The problem a lot of people run into, is they do not stop to think about the proper mix of their portfolio. Asset allocation is the process where the proper mix is determined. You need the type of mix that will continue to grow even when the stock market is not growing.

A companies size is determined by their market capitalization. Market capitalization is merely the multiplication of the number of outstanding shares by the current stock price. There are three different categories that companies are grouped into. These are Large Cap, Mid Cap and Small Cap. This grouping is done by the company’s market capitalization.

The website, Morningstar.com, is a good place to go to determine the type of the stocks or mutual funds you are looking at. At the top of the page, across from the welcome words, is a search field. Type your fund name here. Morningstar will display information about that fund you have input.

Part of the way down the page, you will find a box that has 9 different boxes within a larger box. This is called the style map. It details the type of fund this is. For example, it may be large, mid or small and also may be a growth, value or a blended fund.

Many times investors think they need to own a mutual fund for each one of the nine boxes that Morningstar classifies stock as. This is not correct. This will create a counter productive mix of your funds. What you want is a simplified mix of large, mid, small cap funds divided between growth and value funds.

Growth fund investors are looking for fast growing companies and value investors are looking for a bargain. Growth fund managers are looking for the companies that are growing faster than the average and value fund managers are looking for stocks that are undervalued.

A proper mix to begin with is to have one large cap value fund and one large cap growth fund. Next pick two funds that have a mix in the small and mid cap funds. One can be a growth style and one can be a value style. For example you may have a small cap growth and a mid cap value or the other way around. Next choose a good international fund. As you look around Morningstar you will find a graph that rates the performance of the funds you are looking at. This will help you to determine the funds to choose. We will spend more time on that in another article. As you become more experienced, you may want to branch out a little, but remember, keep it simple and do not try and make your portfolio complicated. No more than 5 – 7 funds is needed.

It is also a good idea to check the mutual funds holdings. The mutual fund you choose should have investments in more than 10 stocks and should not have more than 10% invested in one particular stock. If the fund you are looking at is not diversified, you may want to rethink your selection.

You should also choose several different industries. Too many times, investors overweight their investments in the same industries. This increases your risk and is counter productive. Choose industries that are in vogue and are growing. If you like an industry that is not growing, wait, it will come back. It is not worth it to invest in an industry that is not going anywhere for a couple of years. Then you are just waiting and not growing.

Another mistake investors make is to not invest using an investment strategy. They take the time to set their goals but do nut use a well defined, appropriate asset allocation strategy that accurately reflects individual objectives. The selection of mutual funds becomes just a haphazard exercise. The investment ends up not doing what the investor intended. Take some time to plan, and then take some time to implement your plan.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Deciding on your investment time horizon or time line is a crucial step in determining your investment strategy. Your time horizon is the time from when you begin an investment strategy and when you need the money.  For example, if you were saving for a home and wanted to move in after 3 years, your time horizon would be 3 years.

Knowing your time horizon is crucial because you need to know how aggressive you can be with your investments. All things being equal, you can be more aggressive with a longer time horizon.  There are specific strategies and asset classes that make sense for each investor’s time horizon and that should guide you in the decisions you make.

Time diversification or remaining invested through several market cycles helps you to reduce the risk involved with investing.  Time diversification is especially useful with stock investments where in the short term, there may be both up and down swings.  Time diversification helps to smooth out those swings.

Because you can reduce some of the risks through time diversification, a longer investing time period allows you  to take on greater risks and thus benefit from a higher return on your investment.  With a shorter time period you will not be able to diversify over several market cycles, so you will need to settle for lower risk, lower return investments.

To make the most of time diversification it is important to remain invested over more than one market cycle.  A market cycle is a period of time of at least five years.  If you can invest in more than two or three market cycles, the opportunities open up.

For instance, with a time period of 2 – 3 years, you should probably invest in money market or certificate of deposits.  For a time period of 4 – 8 years, you can probably invest in government or corporate bonds or even some high value stocks which are known to consistently pay dividends.  For greater than 8 years you can probably invest more in small company or growth stocks.

If you are establishing a goal for retirement, you need to remember that with retirement goals, depending on your age, you are probably investing on an extensive time horizon.  However, with this goal, you need to realize that you really have two time horizons.  You have the time horizon which goes to your retirement age, but then there is the time horizon from retirement to death.  Many people are living into their ninety’s now, so you should really plan accordingly.  You should still plan on some aggressive investments even after your retirement.

Another thing to remember is that as time progresses, your time horizon shrinks for your goals.  A time horizon of 8 years after a period of 4 years now becomes a short term time horizon.  You will need to constantly evaluate your time horizons and plan accordingly.

Identifying your risk tolerance and time horizon helps to set your investment strategy.  Your strategy will help you decide how much of your portfolio is going to be invested in bonds, stocks, and stable value and money market funds.  This is known as asset allocation and is discussed in another lesson.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind.  The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials.  Trading of securities may not be suitable for all users of this information.