Investment Strategies For The Long Term Investor

by The Smarter Wallet on September 29, 2010

Some thoughts on different stock market strategies.

Investment strategies tend to vary a lot based on the personal styles and risk thresholds of the investors themselves. It’s a lot like a poker game. All the players can utilize the same strategy and have completely different outcomes. Why? Because each strategy is influenced by each particular player’s personality. Not to mention that the playing environment is ever changing.

So, what does that mean for you as an investor? Basically, what this means is that after you’ve opened an online broker account but before you start trading, you need to think carefully about which strategies to employ and make sure that they fit your personality type and risk profile. This is to ensure that they are earning you the most amount of cash and allowing you to take on an amount of risk that you are comfortable with. When it comes to investing, there are some rules you want to follow to help you sleep at night.

Investment Strategies For The Long Term Investor

Here’s how it works: think of your portfolio as a grocery cart. When you first start out, it’s empty. As you start down your investing aisle, you pick up a stock here and a bond there, testing the waters and deciding whether or not you enjoy the taste, texture and feel of each product. Each time you find one you like, you hold on to it and try to find more of them like it, but those that don’t settle well, you either decide to trash or to avoid in the future. The longer you invest, the more full your basket becomes.


Now, let’s take a break and look at what you have in your basket. Odds are that you probably have a mish mash of a lot of different things: a few stocks, a few bonds, a mutual fund or two. For those that are a little less traditional, there may be some options contracts, some futures, and a whole host of other items. What you’ll notice about your basket, and the baskets of all the people around you is that it’s full of all the things you like (like cookies, candy and stuff) and not so much of the things you don’t (no Brussels sprouts!) Your neighbor’s cart may have a few Brussels sprouts, but your neighbor might actually like them — there are a few of those folks out there.

In a nutshell, your portfolio is as diverse as you are. Your mix of investments, no matter how popular, strong, and grand they are for you, may not necessarily work for someone else, and vice versa. Now, this isn’t to say that you’re allowed to pick stocks based on the fact that you like the company’s pretty new website or that it makes sense to buy Apple stock thanks to the release of iPhone 4 without first knowing what the fallout is going to be since the doggone thing just doesn’t seem to be able to allow left handed folks the ability to make phone calls. But, knowing who you are, what risks you are willing to take and what your long term goals are, will help you make good decisions in the face of all of that information out there.

This is not a new concept, either. Shawn Menard, author of Risk Management: A Dynamic Process, supports the idea that not only should investors invest using good common sense AND with a good understanding of their emotions, but that they should also mix it up every now and again as a way to minimize volatility in their portfolios. Known as “style rotation”, the technique of using individually nuanced investment strategies and then rotating to a new, individually nuanced strategy after a bit is all the rage and is showing great returns for the investors choosing to employ it.

What Is Style Rotation?

Let’s look at a quick and simplistic example that describes style rotation. There are two main styles of picking stocks: the value method and the growth method. Value investors buy cheap stocks and hope for a modest return, while growth investors usually ride the momentum of stock price increases and shoot for growth. Let’s say that your typical investment strategy is value and you tend to stick with technology stocks because you like gadgets and you know a little bit about the companies and the industry. According to Menard, in order to maximize your investment potential, you could consider trying out a growth investment strategy at some point, while sticking with tech stocks. Changing things up a bit helps to further diversify your basket, spread your risk and capitalize on the benefits of other investment strategies.

The bottom line is this: There are a few different ways to diversify your portfolio and manage risk. But ultimately, it’s about choosing to pick investments that are fundamentally different from each other as a kind of “cover all your bases” strategy. Spread the risk around and think long term if you want to grow your money.

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