What is your strategy?
Depending on your age, financial situation, and your goals you can consider two basic options: the defensive strategy or the aggressive strategy. Benjamin Graham suggests the investor should never have less than 25% or more than 75% of his funds in common stocks, and the same inverse range between 75% and 25% in bonds.
If you choose to play it safe this is a good place to start. Defensive strategy would be a very simple one and that is a 50%-50% split. You would invest 50% of your funds into bonds and 50% into stocks. This method might be good when you want to play it conservatively, but keep in mind the returns will be conservative as well. If you are ready for retirement, you might want to lower your stock percentage and focus more on bonds. Again, everything depends on where you are in life and what you are trying to accomplish. Types of securities to consider with this might include:
- US Savings Bonds
- Other US Bonds
- State and Municipal Bonds
- Corporate Bonds
- Treasury Bills
This approach is more common and is much more exciting than the defensive one. Keep in mind that this method requires more work and it could be more stressful due to certain risks that come along with it. As far as where percentages fall we can say that this strategy requires a 75% stocks to 25% bonds ratio. When relying on stocks it is crucial you do your research and pick companies with solid financial record and a long history of success. You need to consider:
- Buying in low markets and selling in high markets
- Buying carefully chosen ‘growth stocks’
- Buying bargain issues of various types
- Buying into ‘special crisis’ ( e.g. Oil market crisis of 2014)
Balancing your portfolio
One key thing to remember, regardless of your strategy approach, is to stay true to your original ratio of stocks and bonds. Let’s say you decide you are going to stick with 60% in stocks and 40% in bonds, you are continually trading and your stock holdings grow over time. This will eventually offset your original ratio of 60/40 and your portfolio might become more risky or more defensive. This is where you have to step in and make an adjustment to rebalance your portfolio to a desired position.
Dollar Cost Averaging
Ideally you would want to put the same amount of money into your portfolio every month. This would help with the market volatility and you would protect yourself from any major loses. If the market is selling high you will buy less, and if the market is selling low you will buy more shares- it’s a win-win situation. Remember that you are buying shares of this company because you have done extended amount of research and you are confident this company is in for the long haul and it will prosper in decades to come. This investment strategy is tough to achieve due to certain life events that just won’t enable you to do so, but if you chose the Dollar Cost Averaging approach you should strive to be as disciplined as possible.
Note: Content found on this website is not an actual investing advice and you should do your own research before committing to making financial decisions. This website is strictly for informational purposes and it does not recommend to buy, hold or sell any securities mentioned.