The best investment strategy focuses on strategy and asset allocation, not on picking the best investment year after year. Few people really have any investment strategy at all, and they lose money in years like 2008 and 2009. If you want to make money in your investment portfolio in the future, and sleep at night, read this. I’ll keep it simple.
The best investment strategy is not about pulling your hair out to find the best investment or even the proper asset allocation or investment mix each year. That’s a formula for frustration. Instead, the MOST IMPORTANT thing you can do in the future, your best investment strategy, is much easier and requires no crystal ball. It starts with simple asset allocation; and then comes the important part. First I’ll tell you why most people have lost money in recent times, and then I’ll tell you what you can do to make money in the investment game without sweating the details.
Most people invest much like they play any other game they don’t really feel up to speed on. If they go into the game with a plan of action, they fall apart as soon as the unexpected happens. Then, they REACT as their emotions take over. That’s what investors as a group have done in recent times. They’ve sold stocks and stock funds out of fear because the stock market went south; and put this money into bond funds for greater safety. The end result was predictable using hindsight, because this has happened before.
Once again the average investor sold stocks when they got cheap, and will likely start buying them again when they feel that they are missing the boat. At that point in time stock prices will likely be high and ready for another tumble, if history again repeats itself. Now, let’s focus on the best investment strategy for getting and staying on track in the future. Asset allocation refers to how you invest your money across the asset classes… stocks vs. bonds vs. truly safe and liquid investments. Even if you just invest in a 401k plan or in other mutual funds, the following investment strategy is available to you. To keep things real simple, assume you’re looking at your investment options in your 401k or fund company you invest with. The options will be similar.
What percent of your total investment portfolio are you willing to put at risk to earn more vs. what percent do you want safer vs. how much do you want really safe? Let’s say you’re willing to put half at risk, but want the other half as safe as possible. Your asset allocation: 50% to stocks funds and 50% to a money market fund or stable account if you have one available. That’s how you allocate the money you already have invested, and that’s the way you allocate any new money you invest periodically.
Once you have repositioned your money to 50% stocks and 50% safe, the really important part of your ongoing investment strategy comes into play; and here is where investors drop the ball. At least once a year, or when the stock market action is extreme, check your asset allocation percentages. REBALANCE if you are not still close to 50-50. If you had done this in the recent past, you would have made money in your investment portfolio. You would have made money in the past decade as well. Here’s how the rebalance part of our best investment strategy would have worked with the 50-50 example in 2008-2009.
If you went into 2008 at 50% stocks and 50% safe, by early 2009 your safe investment would have been worth more than 50% of the total vs. your stock funds since stocks took big losses in that time period. To rebalance you would have moved money from the safe side to your stock funds to make both sides equal again. In other words, you would have bought stocks cheap. Then a year later in early 2010 your stock funds would have accounted for well over 50% of your total, since stocks soared the last 9 months of 2009.
So, with things again out of balance you rebalance again in early 2010, which means you move money from stock funds to the safe side and lock in some profits. As a long term plan this is your best investment strategy because it has you buying stocks or stock funds when prices are lower, and taking profits when stock prices have risen. Emotion and guess work are taken out of the picture. Focus on balance and rebalance. Some 401k plans and other retirement programs offer this service and will automatically do it for you per your instructions at no cost.