Let's face facts. For a while there, investing was
so easy that a chimpanzee could make money in the stock market.
Unfortunately, reality reared its ugly head and all
those high-flying portfolios with their paper profits came crashing
back to earth. That's when a lot of monkeys who thought that getting
rich in the market was easy discovered that ignorance wasn't simply
bliss, it was also hazardous to your wealth.
Think about it. If putting together a profitable portfolio
was all that easy, why wasn't everybody rich already?
Still, despite occasional carnage on Wall Street,
people do build fortunes in the stock market. Over the long haul,
investors with a sound strategy make money during the good times
and hold onto their cash through the hard times.
The question, of course, is: Which sound strategy?
There are several, it turns out, and experts disagree
over which is best. But most of the experts do agree that what's
most important is to have a strategy and stick with it through markets
both bull and bear.
To help you make a choice, we've defined the five
most-popular investment strategies, so you can see how they compare.
1. Buy and hold: This
is the most conservative and most boring way to trade stocks. But
it may also be the most efficient. Investors simply choose quality
stable or blue chip stocks and hold them for many years.
Long-term investors don't worry about market fluctuations
because they figure that their stocks will have time to recover
from a down market. No more looking at the stock ticker every 15
minutes. Just sit back, relax and wait for your rewards. You also
save a bundle on broker commissions because you're not paying for
The catch is that choosing the right time to sell
your investments can be tricky. You can counter this problem somewhat
by knowing in advance when you'll need the money.
2. Short-term trading:
This method was a favorite for people looking to make a quick buck,
but lately they've taken their lumps. Basically, it involves buying
and then rapidly selling stocks to capitalize on volatile markets.
Day traders can win or lose a fortune in a single day.
The problem with short-term trading is that you're
bound to lose money in the long run. Want proof? Let's say your
portfolio matched the S&P 500 Index. Look what would have happened
if you, in an attempt to time the market, had missed some of the
best days on Wall Street over 10 years.
500 Annualized total return
(Dec. 31, 1989 - Dec. 31, 1999)
|Missed best 10 days
|Missed best 20 days
|Missed best 30 days
|Missed best 40 days
|Source: Cassaday & Company
"The primary reason why it doesn't work is that mathematically
if you're buying and selling on an ongoing basis, it's what's called
a zero sum game," says Stephan Cassaday, a certified financial planner
in McLean, Va. "At some point you will certainly have some winners,
but you'll also have losers."
3. Asset allocation:
The way this strategy works is by diversifying your portfolio into
various asset classes (stocks, bonds, cash) rather than focusing
on individual stocks.
For example, you could create a global equity portfolio
made up of 80 percent U.S. companies and 20 percent international
stocks. Then you'd further subdivide that portfolio between small
and large companies both here and abroad.
This method minimizes your risk, but it also lessens
the chance that you'll strike it rich because you're not heavily
invested in one area. In other words, you won't strike out, but
you're also not likely to hit a home run either. Still, many financial
planners prefer the safety of having steady, though unspectacular,
"The most secure way to making money in stocks
is to have a broadly diversified portfolio and to hold it for long
periods of time," Cassaday says. "Depending on the array
of stocks that you choose, the results will be different. But they'll
almost always be positive over five-year periods and certainly over
10 and 20 year periods."
"Asset allocation is going to give someone the
most consistent rate of return over the longest period," adds
Jim Maher, a certified financial planner in Deerfield Beach, Fla.
"It takes the guesswork out of choosing individual investments.
It eliminates market timing. That's what it's supposed to do."
4. Investment systems: There
are dozens of systems that promote themselves as a guaranteed way
to beat the market. Most of these are just marketing gimmicks designed
to sell books and attract financial seminar goers. However, some
systems have performed well for certain periods.
One of the most popular systems was called the Dogs
of the Dow, which is updated annually. Here's how it works: You
invest in the 10 highest yielding Dow Jones Industrial Average stocks.
If your stock falls out of the top 10, then it's time to buy the
new dog stock to replace the other one. The Dow measures the overall
change in the stock value of 30 of the largest firms in the United
States. The highest yielding stocks are those that are paying the
For several years, betting on the Dogs of the Dow
proved more profitable than investing in all the stocks that comprise
the Dow. But when tech stocks took over the market for a few years,
the strategy lost favor.
Some experts say that was inevitable.
"Nothing like this will work consistently over
a 20 to 30 year span," Maher says. "Think about it. If
I found a surefire way to make a lot of money in the market, why
would I tell anybody? Either to sell a book or because I can't make
enough money doing what I'm telling everyone to do."
5. Dollar-cost averaging:
This is one of the most reliable investment plans. If you have a
401(k) plan that automatically withdraws from your paycheck, you're
dollar-cost averaging. To do it on your own, put a set amount into
a mutual fund every month.
The neat thing about this system is you are buying
more shares of stock (or funds) when the prices are low, like now,
and you bought fewer shares when prices were high and the market
You can dollar-cost average by having money
automatically withdrawn from a bank account, avoiding the need for
a minimum deposit. Some mutual fund companies will waive the required
minimum deposit if you agree to make automatic deposits each month.
-- Updated: May7, 2004