Financial Investment / The Importance Of Strategy

Financial Investment portfolios need sound strategies which protect and provide growth despite the endless barrage of financial and political calamities. The problem for many investors though is what financial investment strategy to use. Many investors seem to look upon a financial investment as nothing more than gambling but they are wrong.

The Greek Debt Crisis which has mushroomed into the Europe Debt Crisis has taken the attention off the United States Debt Crisis, and to be fair, probably the World Debt Crisis. The debt of the world seems incredibly scary for investors. The other day a fellow investor told me he wishes he had spent all his savings because then he wouldn’t have to worry about his financial investment portfolios so much.

Having a strategy for his financial investment portfolios would make a world of difference and stop his worrying. I read an interesting article today on Seeking Alpha where the author talks about a fellow investor who isn’t investing until the Europe Debt Crisis gets resolved. Select this financial investment link to read the article.

I am sure there are many investors who feel the same way. The problem is that once you pull back from investing waiting for a crisis to end, there will always be another crisis. I commented on the article that since I started investing more than 30 years ago, the market has been plagued by everything from the oil crisis of the 1970’s to double-digit inflation, Enron, WorldCom, Savings and Loans Crisis, Russian Currency Crisis, Japan’s Ongoing Recession, NASDAQ Bubble, Housing Bubble, and now credit and debt crisis.

Financial Investment needs a strategy

Markets are always volatile. Turmoil is what creates opportunities in a financial investment, but without having a strategy it is impossible to receive consistent profit and growth while being protected from market gyrations.

Financial Investment Needs A Strategy

If I waited for every crisis to end before investing I probably would never be invested and wouldn’t need to be concerned about a financial investment strategy.

The importance of strategy for a financial investment is a priority for its success. There are literally hundreds of financial investment strategies. Many I have never even heard of such as goal based investing. Select this financial investment link to read about it.

Age Is No Barrier To Financial Investment Success

In the 1970’s while waiting in a gas line up to pump my savings into my gas guzzling hog, I actually felt pretty comfortable with the state of the world. It was because I had a financial investment strategy that I had used for 4 years to that point and I had just gone through a 49% collapse of the S&P, yet I was still investing and earning income and growing my profit. I was young then so perhaps you think it was my youth that allowed me to stay with my financial investment strategy.

But now in my “sunset years”, I have the same level of comfort and am still investing at a time when many investors feel that the world is on the verge of Financial Armageddon (again). The 2008 credit crisis, which truly was a derivative crisis, seems to have led to the Greek Debt Crisis which has led to the Europe Debt Crisis and naturally many investors feel that the world is spinning out of control.

I can assure you that it has always been spinning out of control. But if your financial investment is not spinning along with it, then you have reached a comfortable level.


Financial Investment Success Depends On A Sound Strategy

A consistently performing financial investment must have a sound strategy to withstand the volatility of equity markets and bond markets. The strategy must have been back tested, paper traded for extended periods and tweaked to provide protection, profit and income and allow the investor to sleep well without worrying about his financial investment.

There are many strategies investors use. I read the other day about a group of investors who started buying dividend stocks in 1999 and on every severe market pullback they buy more of these dividend payers. They are not worried about the future. As one of them said in the article, “if the markets disappear tomorrow and take all our money, it really isn’t going to matter because the world would have ended anyways.”

That’s a novel way of looking at a financial investment strategy. To understand better what I mean by The Importance Of Strategy with regards to a financial investment, here in a concise few paragraphs is my strategy from the 1970’s and which I still use today.

Financial Investment – 30% Cash For “Black Friday” Opportunities

I keep 30% of my capital in cash. The cash has allowed me through more than 3 decades of investing to jump in and buy stocks at deep discounts

Financial Investment requires cash to always be available for opportunities.

It is impossible to be prepared for a financial investment opportunity such as a market crash or stock crash. Having cash always available means every opportunity can be taken advantage of.

when a market collapse puts them on sale or one of my favorite stocks falls too far, too fast. After I buy them, in every instance they have eventually run back up and I have sold them for a good profit and then returned my cash to its portfolio where I wait for another opportunity.

Opportunities Abound When I Have Cash Available

These opportunities have been many in the past 12 years. I used my cash in 2000, 2001, 2002, 2003, 2006, 2008, 2009, 2010 and this year (2011) in both August and again in October. While keeping 30% of my portfolio in cash may seem high, it works very well for me and it is often out there working hard for me. I don’t worry that the cash is only earning money market rates when it is idle. All it takes is one crisis to generate big enough returns to last many years. In 2009 for example my cash return was enormous. You can view those trades from my US cash account here and my Canadian Dollar Retirement (RRSP) account here. Suffice to say that cash works because when markets have severe pullbacks, cash gives me the confidence and the opportunity to jump in and buy stocks at fire sale prices.

Financial Investment – 30% In Bonds Because They Are Reverse To Equities

I keep 30% of my capital in bonds. Bonds or fixed income is for obvious reasons. When stocks decline bonds almost always increase in value. By having 30% in bonds, almost one-third of my portfolio will gain in a market crash. I then sell those bonds and wait for bonds to fall out of favor and buy back in. Surprisingly bonds have always been considered a safe investment, but in reality they can be volatile. Investors feel bonds are safer because they assume they will receive their capital returned to them when the bond matures. But bonds have failed many times and I have lots of friends who owned corporate bonds of now defunct companies.

Financial investment in bonds often means when stocks fall bonds produce better profits.

As a financial investment most investors look upon bonds as stable and safe. In truth bonds can be as volatile and risky as stocks. They can also be highly profitable when equities fall out of favor. When no one wants bonds, I buy them. When everyone wants them, I sell.

Financial Investment – 40% For Equities Despite The Market Climate

The last 40% of my capital is for equities. But my strategy is not buy and hold. I prefer to find companies I like and set up a strategy of put selling and covered calls. It’s a fairly simple strategy that is tweaked depending on market direction.

Market Up – Less Protection More Profit

When the market is in a defined uptrend such as the market was earlier in 2011 my financial investment strategy is more profit and less protection. I sell just slightly out of the money puts. If assigned shares I sell just slightly out of the money covered calls.

Market Down – Less Profit More Protection

When the market turns down as it has done since May 2011, my financial investment strategy changes to more protection and less profit. I sell farther out of the money puts on stocks I would own and if assigned I sell deep in the money calls until exercised out. I then repeat the process.

My equity strategy can be seen in all my trades through my website. On many stocks I have trades back to 2008 and many are still ongoing. I have back-tested my strategy, paper traded my strategy and tweaked my strategy. In this way I can stay the course with my financial investment portfolio knowing that it is my strategy that has gone through one financial calamity after another and each time provided me with what I needed to stay invested in any market climate, profit, growth and protection.

I urge investors to develop their own financial investment strategy which they can profit from despite the economic climate because once the Europe Debt Crisis is “old news” a brand spanking new crisis will emerge to once more test your financial investment fortitude.

  • Terry

    I think the proposal for EU that will e voted on on Thursday will fail. When should I buy puts on SPY?

  • Europe’s politicians have tried 4 times already. They do not seem to realize that this is a monster project and it will take years of austerity and careful planning to save any of these indebted nations from some form of default.

    As to spy puts, if you want to gamble I suppose then Thursday could be a day but I don’t gamble so I wait for clear signs. There are so many chances to earn from spy puts that I rarely jump in without the market timing technicals telling me clearly that the market direction is down. Then I like to trade daily with my spy put hedge.
    Teddi