Tim Parker of Elementary Finance offers some stock investing tips.
When Investing, Everyone Thinks They’re Right!
If you watch any of the financial news channels or talk to any of those people who are considered the best in the financial world, one of the first things you will find is that everybody has an opinion and everybody feels that their way is the best way.
I believe that the reality is much different. While you will find a lot of people who are clearly not doing well, you will also find a lot of investors who are doing it right but who are using various approaches. While there are a lot of opinions, I can think of at least one truth that has no controversy: Use any legal investment strategy you would like but the object of the game is to make money and that is how you determine success.
My Top Stock Investing Strategies
I’d like to share with you how I do my own investing; my strategies are pretty much rooted on the basic principles of long term investing that many (if not most) investors espouse:
Rule #1: Invest with your financial goals in mind.
First let me say that I have a full time job outside of the financial world, so I’m one of countless stock investing hobbyists who enjoys participating in the stock market on the side. My primary goal for investing is to build my retirement portfolio. I’m not looking to buy a private jet or a yacht in a few years nor am I looking to one day become a full time investor (at least, not anytime soon). My strategies revolve around who I am and what my goals are. Among the many stock investing tips that are out there, apply this one first: know who you are and why you’re investing. This doesn’t seem like it would be important but I assure you that it is. It will change the way you invest.
Rule #2: Diversification rules!
If you could see how I invest, you may actually think that I’m overly conservative with my portfolio, and you would be partially correct with that assumption. The first thing I do is split up my money. For the sake of easy numbers, let’s assume that my portfolio has $10,000. (Don’t you get tired of reading those articles that give you all the best stock trading tips and investment advice for managing your $10 million dollars?) Often, when I help somebody set up a new portfolio, we start with a piece of paper upon which I draw 5 circles. This is where my “island theory” comes from.
My $10,000 has to be split into pieces. Pardon the analogy but I’m going to describe this as such: think of the pieces as 5 different islands that are far away from each other but in the same ocean. If a hurricane comes through and damages one island, the other islands are fine. Of course, because they are in the same ocean, they will all affect each other at least a little bit.
My island theory is simply an analogy for stock diversification in the investing world. This is the most important investing strategy that I follow. Don’t subscribe to information that says that you don’t need to diversify. It’s essential for protecting your assets. So let’s take our $10,000 and split it into five parts. Each of our islands is going to have $2,000. We don’t have to be exact with our numbers but we have to be close: within $100 is my general rule. You can’t take from one island to help another.
Next, each island has to look different. One island can’t be made up of computer stocks and another island made up of telecom stocks. These are all technology stocks and only one island can be based around tech.
So basically, that’s the kind of diversification I do, in a nutshell. Many people achieve great results by simply investing in index funds or a target date mutual fund. I prefer to diversify this way, by fully controlling my portfolio and picking my own stocks. I’ll follow up later to discuss what I have in my islands (or buckets), and to talk about the rest of the ways that a part time investor can make money.
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{ 12 comments… read them below or add one }
Knowing investment goals is so important. Many people chase after the best returns and in the process add a lot of risk. Knowing when you need the money and how important it is to preserve the capital goes a long way in developing a good investing plan.
Hi Tim, You are right. Everyone says that they are correct about investing. I think, actually the person doesn’t want to tell their solution because of fear that if the secret leaks, all will use. I understand your strategy of investment. Well, your island theory fits in my mind, i’ll see if I can put it to use.
I like these two rules. #1: It is always good to ask, “Why am I doing this?” before you invest or before you do anything else for that matter. #2: Diversification is good, too. While you spend the time and while you may have the skill to select good stocks, many people have neither one. That is why funds – but not just index funds, target funds, or ETFs – have become so popular. Investors get to buy into a diversified portfolio if they put their money into a fund. Also, if you do diversify the portfolio yourself, keep in mind that studies have shown you need about 20 different stocks to achieve good diversification.
Diversification is certainly of critical importance. The problem is that our knowledge of what constitutes effective diversification is greatly limited today and too many “experts” are reluctant to acknowledge this.
How many times have you heard the “experts” say that you need to increase your cash allocation to achieve effective diversification? “Experts” hate cash because they earn no commissions when we invest in it. But at times of insanely high stock valuations cash can be the best long-term investment class.
And how about your career? Should that count in your diversification analysis? I think it should. If you are in a high-risk/high-reward career, you should take a safer path with your investments. If you have a safe job, you can afford to take on more risk.
Rob
this is cool. i read a book that said that you must not put all your eggs in many baskets but put them in one basket and then watch it really closely(i think that it is warren buffett that said that) but i am still contending with that. one of the reasons that diversification is good particularly for new investors is because one gets to learn a lot from the mistakes made, which is better than being rigidly stuck at one point
I noticed all your investments were stocks. Do you own bonds? Commodities such as gold or silver?
I would suggest that a diversification strategy that is based entirely on stocks does not adequately create a portfolio that is sufficiently non-correlated. Thats a big mouthful for – If all the islands are in the same ocean, they can all be hammered by the same hurricane.
I would suggest looking to move some islands to another ocean or maybe even a mountain top
Great visual though on the diversification.
Hello,
I really enjoyed this website. Its great to see people helping others with a very real issue- smart investing for a secure future. If we share and educate each other we can empower ourselves to achieve financial security and independence. I encourage you to check out my blog on the subject of stock investing so we can continue to create a helpful community of like-minded individuals:
Kurt’s Stock Strategy Blog
Unfortunately I was not very strong in matters of investment, but one thing I learned in life: – Do not invest all your money into one project, you should always separate them into several parts, creating a “Investment portfolio”, when doing so reduces the risk of loss!
The subject of diversification is often too restricted to different stock groups. But buying different stock groups isn’t true diversification because most groups move in similar directions during big market moves.
True diversification in involves fixed assets and possibly even commodities. But the only type of diversification you hear coming out of the financial crowd are different kinds of stocks. No wonder so many people were hit so hard in the recent market slide!
@Scott,
Not sure what Tim, the guest contributor, has for his portfolio, but mine is pretty diversified with bonds, cash, real estate. I still have to get a little of the precious metals in there. And am adding more “personal loans” via Lending Club notes.
It appears from comments that no one appears to have any real direction in regards to investment strategies. I would suggest, get and stay in mutual funds invested in the best performing sectors of the global market place.
I think diversification is appropriate when investing in the market but it is necessary to understand the conceptual and practical correlation that exists with trading options and diversifying strategies.
Diversification as indicated in this article points out how to invest in more than one holding. But it has a bigger dimension than this; to make your trades diversified you should keep a check on the trade portfolio and see that it consists of conservative and high-risk investment trading options in appropriate proportions.
In order to diversify your trade moves, proper market research and analysis should be done to find out the exact drivers that influence the particular trading option.