Forming a Better Investment Strategy
By Clayton Kurtz
1. Do you have a method to determine whether a stock is over or undervalued?
Determining the value of a stock is obviously important, but do you have a systematic and consistent way of determining worth? I would encourage you to come up with a somewhat simple and quick determination method. I like to look at things like the value of a company’s assets and what their debt situation is, also recent positive or negative news surrounding the company could also affect whether I pass up a stock or make a buy in the short term outlook. I know there are many stocks out there of all different sectors, but develop a valuing strategy that works for the sectors you understand best before venturing out into unknown territory.
2. If you think you understand your investing strategy, try explaining it to someone else.
To quote Albert Einstein, “if you can’t explain it simply, you don’t understand it well enough.” This could not be truer when trying to learn any new skill or concept. Reciting new information you learn will help you articulate it. You don’t have to necessarily explain it to anyone either, you can write down your plans and ideas and it will have the same effect. By doing either or both you create a memory that will give you something too instinctively refer to in times of chaos.
3. Do you have a method to measure the effectiveness of your investing plan?
Whether it be setting learning goals or a promise to buy a safer long term stock, make sure you have a way to determine if your plan is working as well as you would like it to. Having such a method in place will help you stay on track and allow you to adjust your strategy on the fly if something major were to happen.
4. How will your strategy perform in times of prosperity and hardship?
It’s an easy mindset to fall into, the “because the market is strong so will be my portfolio.” This isn’t always the case. You can make money in any market condition, but it’s very important to always remain cautious and be ready to make defensive moves. Personally, I have a rule of thumb to always keep 10% of my portfolio worth as cash in my account. This allows me to be able to make an impulse buy if I see a quality opportunity, and I would encourage you to hold yourself to a similar standard. Some other things to consider is what stocks (and bonds) will flourish in different types of stock environments. Gold for instance generally performs well in a hostile economic environment because unlike paper assets, gold has worth in and of itself. The contrary also applies. When the market doing well gold or other precious metals will decline in value (good buying opportunity for the long-term?) because the worth of the dollar is typically higher and inflation is low.
Following this simple advice is a great fundamental way to improve your investment strategy, and it will also give you a great foothold if you are new to investing. Wall Street may seem scary and intimidating because of how the media portrays it, but the truth is that it’s the single best activity any adult can partake in in-terms of securing their financial future.