Investors often search for an investing strategy they hope will beat the market. Whether using the stock market, index funds or other mutual funds, they look to Wall Street for inspiration on buying and selling. Active trading can sometimes take advantage of favorable stock prices to beat the market in the short term by selling stocks for quick profits. Consistent, successful trading strategies often prove elusive in the long term. Often the most predictable trading strategy can be a “buy it right” approach similar to that used by those who’ve found riches by investing in real estate.
Camarda believes investment success is founded on these key principles:
- Seek long-term, superior performance with lower risk
- Use methods based on academic research and generally accepted “best practice” principles
- Instead of playing investment games of chance, target long-term financial success based on best practices and probabilities. Look to build the wealth you need and want for retirement and other goals.
- Concentrate on overall portfolio performance instead of individual investment results. This is an important key to success – at any point in time, some portfolio pieces will inevitably outperform others. Don’t let them bring you down. If chosen and monitored wisely, they should eventually come around.
Rational investors seek long term superior performance with lower risk. Our review of the academic research seems to indicate better investment results are related to these three guidelines:
- Diversification – spreading investments over many different opportunities can reduce risk. This lessens the chance of any one poor performer really blowing up a portfolio because so much money is tied up in it. It also increases the chances of getting outstanding performers that can enhance returns.
- Buying right – Take a Warren Buffett-like value approach. We believe investing in securities that look cheap compared to their “real value” can produce better returns with less risk. Value investing has the strongest academic evidence of producing higher long-term results. It does require patience. As, with many things, good results take time. Focusing on the short term and getting impatient can cause a lot of anxiety. This can lead to poor decisions. Number-crunching investing can be less sexy and appealing than “get rich quick” methods like market timing. But it may prove much more successful in getting or keeping you rich.
- Stick to the plan, ignore short term trends and media noise. You know, recent trends can be a contrary indicator. What did well recently can tend to do poorer going forward. This may be because “flyers” run up to prices beyond what they are really worth. Also, it is important to remember that the media are in business to get your attention, not to educate you. They tend to be sensationalist. It’s a kind of “this just in!” “better watch now!” pitch instead of a deep analysis. This can interfere with getting a more comprehensive and wiser view of the world. Simple-minded views – the kind the media specialize in – can lead to poor decisions.
Too often, investors can look at the markets as if they are playing blackjack, instead of building a financial foundation to fuel how they want to spend their life. Try to avoid playing “investment poker” – instead, look to build a whole-life investment plan designed to fund your retirement and other family goals.
Camarda believes investment strategies should be designed to help clients accomplish long term financial goals. The point of the portfolios is to provide the wealth clients need and want to fund their retirement and other financial goals effectively.
To accomplish this, we suggest they take the long view, instead of trying to “beat the market” over the short term, though this sometimes happens. We think they should focus on the building blocks for a prudent and effective-long term investment plan. This should be designed to meet investment goals and financial planning needs over investors’ whole life planning cycles.
We think this approach makes a lot more sense than chasing performance and making frequent knee-jerk changes, at the risk of big losses and unmet goals.
In the end, we believe sticking with well-designed and disciplined plans will produce much better performance results.
Finally, it is important to stress the primary reason for diversification: Not every investment will do well, at least not at the same time!
Expecting to get all winners is “too good to be true” and unrealistic. In a diversified portfolio, by design, and at any given time (since the winners and losers tend to change over time), the better performers carry the poorer performers in contributing to overall portfolio returns.
Investors who focus on overall portfolio results, instead of individual stock or fund results, should not only have more piece of mind, but will likely achieve better results since they can understand the big picture better and should be less prone to make poor decisions – like selling “losers” at the worst possible time – which can harm their wealth.
For mutual fund and EFT portfolios, consider a global asset allocation diversification. This offers two-level diversification, and helps to target better returns with less risk:
- By using funds instead of individual securities, you are able to diversify over a very large number of holdings per fund. Generally, this reduces the impact of any poor performers, and can increase the odds of getting some big winners.
- By using funds that focus on specific segments of the markets, like emerging markets or large cap US stocks, you can aim to spread the risk of a downturn in one since different market segments often do not move together. This can also increase the odds of having some exposure to sectors that outperform relative to the others.
This approach uses what’s referred to as “asset allocation.” Diversifying this way is considered a more conservative strategy, even for the aggressive portfolios that are 100% in stocks, because of the second asset class diversification layer.
Generally, asset allocation strategies like these are not designed to “beat the market” over the short term, though this does happen from time to time. Rather, they are intended to provide the building blocks for a prudent and effective-long term investment plan, designed to meet your investment goals and financial planning needs over the long term.
They are “whole life” strategies intended to help ensure your wealth serves as a tool to achieve your financial needs and wealth goals.
We think this makes a lot more sense than chasing performance, at the risk of big losses and unmet goals.
To download a free guidebook by the author on investing strategies, click here.