Posts tagged Investing Strategy
Margin of Safety Investing Strategy
Jan 12th
Margin of Safety is one of the most popular value investing strategies made popular by stock market legends like Benjamin Graham (father of value investing) and Warren Buffet.
Margin of safety is simply a value stock investing model where the investor assigns a margin of safety to his/her value assessments. In value investing, the investor estimates (or predicts) the intrinsic value of a stock. The concept is that every stock has an intrinsic value and price changes from this intrinsic value is just deviations resulting from the actions of market forces. The stock will often return to its intrinsic value when the market forces weaken.
Thus investors who buy stocks when the trading price is below the intrinsic value and investors who sell stocks when the trading price is above the intrinsic value will profit. But what make value investing difficult is predicting the intrinsic value of stock. There are no established rules for finding out this. Investors should develop their own strategies and models for this purpose, according to availability of information and analysis tools he has.
Many traders use different indicators like book value, open offer, P/E ratio, asset to liability ratio, institutional investments, investments in other companies, etc to finding the intrinsic value of the stock.Margin of safety investing strategy easily overcome this difficulty of predicting the intrinsic value. Investors assign a safety margin as percent of predicted intrinsic value (usually is 30 to 40 percent of intrinsic value).
Margin of safety investors only buy stocks when they are trading below margin of safety. In this way he/she can minimize the risk/error of predicting the intrinsic value. The more the percentage of margin of safety the lower the chance of risk, and the better the chance of profit. For example is the predicted intrinsic value of a stock is $10 and margin of safety is 30%, then the trader only buys the stock if the current trading price is below $7 ($10 – 30% of $10). If the actual intrinsic value is only $9, and the stock returns to this level, the investor will have a profit worth $2. The main advantage of margin of safety investing strategy is that it offers a margin rather than a fixed price to reduce risk.
It favors all type of investors, both experienced and novice investors, and does not necessitates any position sizing or market performance requirements. But the disadvantages are that it does not present any rules for assigning margin of safety and does not consider market factors. Also there is chance of substantial loss when margin of safety is less and scarcity of opportunities when margin of safety is high.
What is Capital Growth Investment Strategy?
Jan 12th
Capital growth investment strategy is a widely accepted and followed portfolio management strategy. As the name suggest, the strategy aims at capital growth, maximizing portfolio value, over time. Before we start, here is the danger signal – capital growth strategy is a high risk investment strategy which requires great investment discipline and money management. A portfolio which follows capital growth strategy is mainly comprises of equities. Often more than 60 to 70 percent capital is invested in stocks, preferably growth stocks. Remaining portfolio can be constituted of low profit low risk investments such as fixed income securities, money market funds, cash, and/or precious metals like gold to limit overall portfolio risk. The exact portfolio capital allocation depends on many things like individual profit goals, risk tolerance, risk capital involved, portfolio size and investing experience. Many times one can see capital growth portfolios which allocate more than 90 percent capital to equities. Capital growth investors often prefer small and mid cap stocks over large cap stocks, because these show greater growth and are expected to offer increased return over time. Diversification of portfolio is important in capital growth strategy and is achieved by investing in different products like stocks, options, futures, ETFs, funds, bonds, etc. Portfolios which allocate most (all) of the capital to equities achieve diversification by investing in different industry stocks, different markets, using derivatives to hedge risks, and by investing in both high growth high risk stocks and low profit low risk stocks.Capital growth investment strategy is a long-term strategy, which may or may not require periodical reassessments and rearrangements of portfolio allocations. Investable stocks are found using various growth investing tools and strategies. Active portfolio management is recommended for experience investors, to replace low performing investments with high performing ones. But remember, active management often requires greater costs. The advantages of capital growth investment strategy involve faster increase in asset value and better chance of profit than most other investment strategies. The disadvantages include higher risk, unpredictable returns and high volatile portfolio. With capital growth strategy, market entry and exit timings are very important; and there are too many market, risk and economical factors to be considered. The silver lining is ‘irrespective of frequent ups and downs, the equity market shows almost steady growth in long-term; which is higher than most other financial markets’.
Finding An Investing Strategy That Suits Your Needs
Jan 12th
Choosing an investing strategy can be one of the hardest things an investor does. Many investors also change their investing strategy from time to time depending on market conditions and other contributing factors. An investing strategy should accurately reflect your investing goals, your available funds, and your personal investing style. There are three basic investing strategies and each has hundreds, if not thousands of variations.
A conservative investing strategy is perfect for investors who are afraid of taking risk and losing money. A conservative strategy may involve investing in certificates of deposit, money markets, bonds, and possibly certain mutual funds, such as bond funds. Conservative investing doesn’t have as much potential for high returns as the other two strategies, but you aren’t as likely to lose much principal (your invested money) due to price variations.
A moderate investing strategy offers generally higher returns than a conservative strategy, but is less risky than an aggressive approach. A moderate strategy can include a mix of mutual funds, or a mix of individual stocks, bonds, and a money market. If you choose the individual securities route, a good moderate investment mix could be 5-10% money market, 30-50% stocks, and 30-50% bonds. A moderate investor can rest assured that he or she has good earning potential without a huge risk.
The last of the three basic investing strategies is the aggressive strategy. An aggressive strategy has potential for extremely high returns, depending on the market’s performance. An aggressive strategy also involves a significant amount of risk. An investor is more likely to lose principal when using an aggressive strategy. An aggressive strategy will most likely include 70-80% stocks, 20-30% bonds, and probably very little notable money market or cash reserves. Although 70/30 and 80/20 is very risky, some investors would say this split is only moderately aggressive. A very aggressive portfolio may include 90% or more stocks.
When choosing an investment strategy you should determine three very important things: how much risk you willing to take, how much earning potential you want, and how concerned you are with losing principal. Once you’ve made a firm determination of these three things, you can choose an investing strategy that meets those needs.
Another option is simply to educate yourself in a wealth education area. Many people want the quick money and find that the real fast money is in longer term education towards wealth.
Balanced Investment Strategy for Portfolio Management
Jan 1st
Balanced investment strategy is perhaps the most followed and successful investment strategy for portfolio management. Its primary aim is to keep a balance between investment risk and return.
A balanced investment strategy combines the merit of aggressive and defensive investing strategies. Aggressive investment strategy involves investing in high return high risk investments with the sole purpose of maximizing return from investments. It involves allocating major portion of portfolio capital to invest in equities, equity based funds and highly volatile markets.
Investors following aggressive investment strategy often look for comparatively short-term profiting and wish to invest more in growth stocks, and small caps and mid cap stocks. Advantages of aggressive investing include quick profit, high return over investment and no need of large portfolio capital. It can work really well for experienced investors and investors who are very strict in their money management. Disadvantages include high risk, high volatility in total portfolio value and no surety of profit.
It less supports novice investors and investor looking for monthly earnings or living costs.Defensive investment strategy is just opposite of aggressive investment; it’s purpose is to preserve the capital and ensure some return from investments. It involves investing in low profit low risk investments like bonds, money market funds, treasury notes, and equities with minimum price volatility and good dividends. Defensive investors look for long-term profits and/or monthly earnings. Advantages of defensive investment strategy include reduced risk, predictable income, better investment planning and diversification of portfolio.
This strategy mainly suits beginners. Disadvantages include low return from investments and requirement of high capital investments. In balanced investment strategy, the investor tries to keep a balance between his aggressive and defensive behaviors. It involves balancing of both return and risk by diversifying investments in both high return high risk and low return low risk investments.
Balanced investors often follow a portfolio capital allocation rule telling how much to invest in equities and bonds and how much to invest in treasury notes, precious metals and funds. Usually one portion of portfolio is actively managed and other portion is left to grow automatically. Balanced investment strategy can be slightly aggressive or slightly defensive with respect to investments made.The greatest advantage of balanced investment strategy is the diversification of portfolio and hedging against high total portfolio value volatility. It is good for investors looking for medium-term (3 to 5 years) profits. Other advantages include flexibility in portfolio management, better results with better capital investments, (almost) predictable income and manageable portfolio risk. Balanced investment strategy support both beginners and experienced investors and can be an option for monthly earnings for living.