Investment Strategy

Interestingly I have been discussing this topic with many of my friends recently which motivate me to post it in my blog instead. Please note that this article is not for layman but for audience who is at least familiar with the Technical Jargon. However if you are still interested and bother to google those Jargon, you can still understand them.

The most commonly asked question: "Is there an investment strategy that can work in current and all market condition?"

The answer will be depend on your time horizon and type of money baskets you are investing in. There is no quick answer to it but read on to discover the pot of gold yourselves. If you are sharp enough, you might point out "How about Risk Profile and Investment Objective?"

I would say that Investment Objective is normally either Long Term for Retirement Needs or Short Term for Income Needs, and I am going to cover both anyway. As for Risk Profile, I personally think is crap because when the market is good, almost everyone has an Aggressive risk profile but when the market is bad,they become Conservative risk profile. This behavior is totally opposite from the best known investment theory call "Buy Low Sell High" or "Buy when everyone is Fearful, Sell when everyone is Greedy". Having said that, thanks to all these people who are just doing the opposite by buying high, selling low and sell some more when lower, so that the value investors like Warren Buffet can make some good money and buy some cheap stocks finally! (Note: Value Investing can be apply to all things in life not restricting to stocks market. It can be apply in the way you purchase goods, luxury and property as well)

But wait! Did I say that Value Investing is the only investment strategy to make money? The answer is no. There is another strategy call Momentum Investing where you buy and sell base on trend. You can also use Option Trading or CFD Trading for Momentum Investing where you are allow to short the market and make profit even if the market is heading south aka downturn. I am not going to discuss these strategies in detail as you can find a whole lot of information if you are interested enough and take action to google them. If all seems too alien to you and you only wish to find an Idiot-Proof way of making money through investing, there is a strategy for novice call Passive Investing by investing into all market or sector over a long period of time like 20 to 30 years through Mutual Fund commonly known as Unit Trust or Index Fund commonly know as Exchange Traded Fund (ETF). Again, you can find out more if you google them.

However the number of investment strategy doesn't stops here but I just mentioned the most common one. In fact, my definition of Investment Strategy is the Strategy that work for you (You might still need to fine tune all the above strategy to suit your circumstances and need)! As the famous China leader Deng Xiaoping once says, "Regardless is Black Cat or White Cat, as long as they can catch Rats, they are good Cats". I have a friend who share with me this interesting strategy which he regards as the lousiest strategy. He says he has no strategy in investing, he only invest through feeling where he "Buy during good feeling and sell when the feeling is bad". You might laugh at it and agree with him that this is a most lousy strategy but the most remarkable part is that he is making money so far with this "lousy" strategy! Do you see anything common between his strategy with the famous investment theory "Buy when everyone is Fearful, Sell when everyone is Greedy"? Sometimes, people just don't know how to crystallize what they are actually doing. I commented to him that this is still a strategy although he think is not. Why I say so is just like when someone tell me that he hate decision making, he had already made a decision! He further share with me why he had adopted such a strategy is because there are many people who know how to read all the financial statement, reports and PE ratio but still lost money so why bother? Wow Lau! He win already lor!

The next thing you might be interested is what kind of investment return would each strategy fetch you and within how long? The following is just to serve as a guideline and past performance is not a guarantee of future performance where returns might varies according to actual scenario:

1. Passive Investing - about 12% return annually with time horizon of 20 to 30yrs period
2. Value Investing - about 15%-25% return annually with time horizon of at least 5 to 10 yrs period
3. Momentum Investing - more than 25% return within 3 to 6 months
4. Option Trading or CFD Trading - more than 100% return within 1 day to 3 months

(Note: Option Trading and CFD Trading is a tool while Momentum Investing is a strategy. You can also using normal trading platform for Momentum Investing. The difference is normal trading using Momentum Investing strategy do not give you the leverage and can only long the position.)

Now, you know the time horizon required for each strategy, what is the type of money baskets then? The key to all investment strategy is to diversify into at least 8 to 10 counters at any one time because no matter how much research you do and no matter how good a company's stock can look, things can turn against you with a single piece of negative financial news. Another way to diversify is by putting your money into 4 different baskets namely Security Basket, Growth Basket, High Growth Basket and Luxury Basket.

1. Security Basket as the name imples is for your security with investment target return of 1.5% to 4.5% p.a. which should make up from cash, Fixed-Deposit, insurance & capital guaranteed products. This basket will serve as emergency fund to meet sudden lost of job or paycut.

2. Growth Basket is the basket where you build your net worth & positive cash flow assets that will lead you to financial freedom with investment target return of 8% to 20% using Passive Investing and Value Investing Strategy

3. High Growth Basket is the basket where you ACCELERATE the building of your net worth & positive cash flow assets that will lead you to financial freedom with investment target return of 15% to 25% return using Momentum Investing Strategy

4. Luxury Basket is the basket where you save up to indulge in your dream assets with 0% investment target return. The money to be used for luxuries should not come from your primary source of income but from the passive income generated from your positive cash flow assets e.g. returns from your Growth and High Growth Basket. You should reinvest 80% of the return from Growth and High Growth Basket and put the 20% of the return to Luxury Basket.

You should allocate your investment funds in term of percentage into Security Basket, Growth Basket and High Growth Basket according to your age band. You SHOULD NOT allocate any amount of your monthly savings into your luxury baskset IF you want your savings to have high growth, else you can still allocated into your luxury basket with your primary source of income. The luxury basket should preferrably be filled by the returns generated from your growth and high growth baskets. My experience show that defer gratification will make you more hungry and your mind more active in wealth generating.

Suggestive allocation depending on your age band as follows:

Below 30 years old - 20% Security Basket, 40% Growth Basket, 40% High Growth Basket.
30 to 40 years old - 30% Security Basket, 35% Growth Basket, 35% High Growth Basket.
40 to 45 years old - 40% Security Basket, 30% Growth Basket, 30% High Growth Basket.
45 to 55 years old - 60% Security Basket, 20% Growth Basket, 20% High Growth Basket.
Above 55 years old - 70% Security Basket, 15% Growth Basket, 15% High Growth Basket.

(Note: You should adjust the pecentage in Growth Basket and High Growth Basket according to your circumstances and not neccessary always the same percentage. You might not have High Growth Basket at all if you are not comfortable with momentum investing or you could have zero fund in Growth Basket because you think you are savvy enough and value investing takes too long to double your money.)

To Summarise:

Value Investing or Passive Investing is suitable for people with little time to monitor the market and who have a longer time horizon of at least 5 years putting in the Growth Basket for Long Term Retirement Need.

Momentum Investing using Option Trading or CFD Trading is suitable for people who are more financially savvy with more time to monitor the market and who have shorter time horizon of 1 day to 6 months putting in the High Growth Basket for Short Term Income Need. You can also use this strategy to boast your Long Term Retirement Need as well with consistence return made.

Disclaimer:

No one strategy will guarantee to work as it all depend on the investor's committment place into learning the strategy with hands on experience. You are expected to make some lost initially in order to overcome your two greatest enemy call "Greed" and "Fear".

Some of the ideas in this article is not originate from me but from Adam Khoo's best seller "Secrets of Millionaire Investors" and "Secret of Self-Made Millionares". You are encouraged to read them for more details on the ideas that I have discussed here.