Give me a classic look. How about the little black cocktail dress? How about that navy blue suit? Got the idea? The same applies to that age-old matter of investment strategies. There are certain ones that are timeless.
For one, there is diversification, which means having a nice mix of different investments within each category, whether real estate, stocks, bonds, precious metals, etc. Actually, diversification is the primary characteristic behind most mutual funds. The idea is to cut down on what is known as portfolio volatility.
Next, consider asset allocation, which is really diversification, but going a little bit beyond. In this case it involves a mix of different investments at the same time. For example, while an equity fund may own 100 or more stocks, it might just as easily have problems during a bear market when the stock market itself is on a downward spiral. So, infusing that portfolio with bonds helps offset that.
My friends at First Investors gave me a rather interesting example. The stock market, they said, experienced three consecutive years of overall losses from 2000 through 2002, yet corporate bonds produced relatively strong returns during those same years. "If you had invested $10,000 in the stock market at the beginning of 2000, the value of your portfolio would have fallen to $6,239 by the end of 2002. However, if you had allocated 30 percent of your investment to bonds, it would have mitigated your losses and left you with $8,726 at the end of 2002."
Accordingly, by having a proper mix, it would have been much easier to stick with a plan during the stock market slump and still give yourself the benefit from the strong recovery in 2003.
And, let's not forget about dollar cost averaging. Let's say you've assembled a well-diversified portfolio that meets whatever financial goals you have set and handles whatever tolerances to risk you have. You must keep intact a certain investment discipline. What do I mean by this? You try not to let short-term developments influence a long-term outlook. One good way of maintaining that discipline is by using a systematic investment strategy known as dollar cost averaging that involves investing a predetermined amount of money on a regular basis.
Of course, bear in mind that dollar cost averaging dose not guarantee a profit or even ensure you won't have a loss. Instead, it usually involves continuous investing in certain securities no matter what the price levels.
Dollar cost averaging, it must be noted, helps shake the cobwebs out of investing; you simply purchase more shares when prices are low and fewer shares when prices are high. The result is that your average cost per share will be lower than the investment's average price per share over the long haul.
Naturally, all of these strategies are akin to that black dress and blue suit--they never really go out of style. What is important is to act on them. Kathryn Head, chairman of First Investors, believes that procrastination is the thief of time. "It's been said that 'good things come to those who wait.' But, when it comes to addressing your financial objectives, that's not often the case. In fact, failing to act on important priorities could significantly diminish your long-term financial security. Instead, you need to visualize your goals for the future and begin thinking about ways to pursue those goals."
Diversification, asset allocation, dollar cost averaging, and long-term discipline have all withstood the test of time.
