Posts Tagged ‘investing’

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Diversification is Easy?

April 7th, 2010

Rubik

Recently we came across a discussion at one of financial forums. It’s surprising to see that many people cannot really apply diversification in real life. When we buy Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) stocks; are we diversified? We invest in two different companies; one is the king of consumer and mobile devices; while the other one is the king of Internet search engine. Personally, we would say it is not diversified. Both are large-cap companies. Both are in the technology sector. Both are US-based companies.

How do we diversify then? There are a couple of criteria’s that we can think of:

  • Market capitalization: large-cap, medium-cap or small-cap
  • Sectors: consumer staples, consumer discretionary, financials, industrials, energy, materials, technology, telecommunication, health-care, utility.
  • Country: US, BRIC (Brazil, Russia, India, China), Europe, etc.

Anything else?

What we usually do is pick the leader in one of these criteria’s. We also need to be careful for not over-diversified, i.e. having investment all over the places.

(Picture is from Toni Blay.)

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Beating the Market with Relative Strength Investing

March 20th, 2010

We discussed about passive investing or index investing in our previous posting. The idea is to stay invested with the index. Why? Many people have tried to beat the index, such as S&P 500, but they couldn’t.

How can we beat the index? Some people use market timing to buy low and sell high. Many end-up by buying high and selling low. Some other people use stock picks, just like us, to buy the best stocks and hope that it will beat the index.

There is a strategy called Relative Strength Investing. We read about this strategy in Gerald Appel’s book, Technical Analysis: Power Tools for Active Investors. For those who don’t know, Gerald Appel is the creator of technical indicator MACD (Moving Average Convergence Divergence). We are using MACD extensively in our trading activities.

How does Relative Strength Investing work? It works like betting in a race track. First, we start betting on any horses. After first turn, we change our bet to the horse leading that time. If our horse is still leading, then we hold our bet. After second turn, we change our bet again to the leading horse. The idea is that we always stay with the leader. Gerald suggested that we use no-load mutual funds to apply this strategy. The basic principles are:

  • Identify the leaders
  • Buy the leaders
  • Hold the leaders as long as they lead.
  • When the leaders slow down, sell them and buy new leaders.

You can read the detail of this strategy in his book. He also shows how the performance of the strategy compared to S&P 500.

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Gone Fishing Portfolio

March 18th, 2010

Standard & Poor's

Some people call it “passive investing”.  Some others call it “index investing”. They are all basically an investing strategy that means buying an index fund or ETF. Beating the index, like S&P 500, is not an easy task. Many fund managers are not able to beat the index consistently. Rather than spending time trying to beat the index, why don’t we just stay with the index?

Coach Potato Portfolio

One of the most popular passive investing is The Couch Potato Portfolio, created by Scott Burns. The idea is to invest in:

  • S&P 500
  • Shearson/Lehman Intermediate Bond Index

Investors can adjust the percentage of allocation based on their risk tolerance. For example, investors with higher tolerance can invest 75% in S&P 500 and 25% in the bond index.

 

Lazy Portfolio

Another popular passive investing in Lazy Portfolio from Paul B. Farrell. Paul has 8 different lazy portfolios depending on how complicated or how simple you want. One of Paul’s simplest portfolio is Second Grader’s Starter. It invests in Vanguard mutual funds:

  • Vanguard Total Stock Index
  • Vanguard Total International Stock Index
  • Vanguard Total Bond Index

If you are interested to learn more about Paul’s Lazy Portfolio, you can read his book, “The Lazy Person’s Guide to Investing”.

 

Permanent Portfolio

Harry Browne has passive investing, called Permanent Portfolio, with unique approach since he’s recommending large amount of cash and gold. His permanent portfolio consists of:

  • 25% in US stocks
  • 25% in long-term US Treasury Bonds
  • 25% in cash
  • 25% in precious metals (gold especially)

If you are interested to learn more about Harry Browne’s Permanent Portfolio, you can read his book, “Fail-save Investing: Lifelong Financial Security in 30 Minutes”.

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