Given your risk tolerance, and your need to diversify, explain how the Selected Realized Returns (1926–2013) page 269 and the Effects of Portfolio Risk for Average Stocks will impact your future investment decisions and why
I don’t consider myself risk adverse, but I do consider myself a prudent long-term investor who likes to balance principle protection with reasonable and consistent gains.
Having been in the technology space for the last 25+ years and lived through the dot.com bomb I learned my lessons in the late 1990s and early 2000s regarding the difference between a high-risk investment and a foolish investment. The days of reading Red Herring and making investments based on pure market speculation with the expectation of a combinatorial explosion are long gone, at least for me. Today I am a long investor, who follows a very Warren Buffet’esqe investment strategy.
- I invest for the long haul.
- I keep speculation away and focus on proven business.
- I dollar-cost average into the market.
I’ve been investing using DRIP plans for 20+ years, buying stock directly from companies and avoiding brokerage fees. The days of having to buy and read
The Moneypaper are behind us; now long investors can use services like Capital One’s Sharebuilder to dollar-cost average into the market.
I am a big fan of SPDR (spider) ETFs (exchange-traded funds) like SPY and IYY. SPY and IYY are SPDR ETFs that track the S&P 500 and DJIA. Buying equities like SPY and IYY allows investors to diversify by buying a sock that is a fund made up of other stocks.
Outside of the above rules, I have a simple investment strategy, never invest money in the market that you need back in the short-term. The market is speculatory by nature, so I always keep the perspective that I am gambling. With this said there is also a lot I/you can do to swing the odds in my/our favor. While investing is a different type of gambling than going to Vegas, it’s important never to lose sight of the fact that the bottom is still $0 (assuming your not trading on margin in which case the bottom may be below $0). When the market became depressed in 2008, my strategy was to double down. Why?
- I didn’t have money in the stock market that I needed; thus I didn’t need to accept my loses and take my cash.
- Increasing my positions in what were solid business hit by the depressed economy allowed me to lower my cost basis. This dramatically decreased my time to recovery.
Here is an example:
Desc Stock Position (# of shares) Avg cost / share Current cost / share Cost Basis Value Proft / Loss
Starting Position XYZ 100 $100.00 $50.00 $10,000.00 $5,000.00 -$5,000.00
Buy 1 XYZ 100 $50.00 $50.00 $5,000.00 $5,000.00 $0.00
Buy 2 XYZ 100 $51.00 $60.00 $5,100.00 $6,000.00 $900.00
Ending Position XYZ 300 $67.00 $62.00 $20,100.00 $18,600.00 -$1,500.00
It’s essential to have a balanced portfolio, balancing small-company stocks which are more volatile (highest risk) but hold the potential for more significant gains with investments like U.S. Treasury Bills which are low risk but deliver much lower potential returns. Balancing returns and principal protection should be key criteria in determining portfolio distribution.
Brigham, Eugene F., and Joel F. Houston. Fundamentals of financial management. Boston, MA, Cengage Learning, 2016.
Frankel, Matthew. “3 Pieces of Warren Buffett Wisdom for an Expensive Stock Market.” The Motley Fool, The Motley Fool, 4 Sept. 2016, www.fool.com/investing/2016/09/04/3-pieces-of-warren-buffett-wisdom-for-an-expensive.aspx.
“Recent Articles.” DRIP Investing – Direct Investment Plans & Dividend Reinvestment DRIPs | Moneypaper, www.directinvesting.com/.