Thursday, January 28, 2010

One Strategy for Investing

Wanting to get back into stock market after being out for awhile, I decided to read more books on the subject. One book I wanted to get my hands on was The Intelligent Investor by Benjamin Graham. He was described as the grandfather of value investing.

In my previous foray into investing, I did not approach it with a specific strategy, and managed to break even before getting out.

This time, I decided to do a little research before doing it again, and The Intelligent Investor seemed a good book to read, since I was intrigued by the value investing approach.

(To make my reading more efficient, I decided to apply some reading techniques that I learned from a PhotoReading course I had, mainly, by asking specific questions of the text. I think I might have even made a Mind Map of what I read.)

With the help of the commentary by Jason Sweig, I was able to glean some basic ideas:

  • There are two types of stock market investors: passive investors and active investors. To be an active investor, you would have to do an enormous amount of research and actively manage your investments full-time, somethings which most people would not be able, or willing to do, leaving the passive approach as the ideal one. The passive approach would require very little tinkering, and slight adjustments over the years. A "set-it-and-forget-it" technique.
  • The best way these days to implement a passive approach would be to invest in stock market index funds. The stocks in these funds are chosen by a set of rules to make it into the fund, as opposed to being actively managed by money managers. This might not be a bad thing seeing that the S&P 500 Index beats a great majority of money managers over the long term!
  • Almost no one should be 100% invested in stocks, since it is extremely difficult to hold on to stocks if there is a market crash. At least 25% should be in bonds. Should the market nose dive, you will have the guts to stay in the market, since the bonds you hold will maintain or increase in value during market downturns.
  • Investing should be done regularly, to yield the effects of Dollar-Cost Averaging (DCA): over time, the average cost you pay per unit will go down. The idealness of DCA, however, is up for debate. One school of thought suggests that yearly lump-sum investing actually yields higher returns over the dollar-cost averaging approach! Here is the study.
  • Of course, one must diversify his or her portfolio.
With that knowledge, I parked my savings for retirement into four different index funds offered by my bank: Bond Index, Canadian Index, U.S. Index, and International Index, with a pre-authorized purchase plan to automatically buy units every month.

That was in early 2008. I have now stopped contributing to that, and instead decided to do a lump-sum investment at the end of this year into my wife's retirement account.

Let's see how it goes.

No comments:

Post a Comment