What Investment Strategies are the Best in Today’s Environment? January 21, 2009Posted by shaferfinancial in Finance.
Tags: active investing, buy-and hold investing, how people have made money investing, investment strategies that work, real estate investing, trend following investing
I get this question much so I thought I would post on it today. Research indicates through all the ups and downs going back hundred’s of years, you can make great returns using several strategies. Now let me be clear, all these strategies we are looking at are long term, greater than 10 years, and require one to accept the actual evidence, not the propaganda. Any strategy can create losses short term that must be protected against using risk management.
First a listing of the failed strategies. By failed I mean failure to produce double digit returns, which are required to produce wealth. Now I have posted on many of these strategies as a way to protect wealth against inflation once it has been acquired. But what we are analyzing here is wealth creation, not wealth preservation.
Savings accounts, Certificate of Deposits, money market accounts, Bonds (corporate or government), mutual funds, cash value life insurance, cash, and unleveraged primary residences (real estate) all are failed wealth creation strategies that folks flock to in time of fear, like now.
Now on to the successful strategies. By successful I mean that we have proof that many folks have used these strategies to get double digit returns over more than 10 years and have created wealth (from small to grand) using the strategy.
My favorite for middle class folks is investment real estate. Why, because it does not involve folks having to constantly monitor the market or create a set of elaborate rules or to have to be ready to trade on a moments notice. Here are the facts, most folks can use leverage to create returns that will build the needed wealth investing in real estate without taking great risks. Over the last 1 hundred years the average return for real estate has been around 5%. Truth is you don’t even have to get that return to build the needed wealth because you can leverage it 3 to 1 easily by getting a mortgage at 75% loan to value. The critical decisions are done up front before you purchase. The metrics for analyzing the investment are simple enough anyone can learn them. And there are people out there who get paid to help you by the seller of the property, which gives the rookie a chance to take advantage of their experience at no initial cost. Now I suggest figuring in the cost of a management company to take the pressure of managing property off of you, but you still will have to deal with many issues. Having a proper reserve fund is the first rule you need to abide by! This is an active investing strategy not a passive one! For more advanced investors there are real estate development companies to invest in, single projects to invest in, etc. More wealth has been produced by real estate than any other investment class since the beginning of human commerce.
Next is buy-and-hold stocks or the Warren Buffett way. Now I suggest folks start by allowing Mr. Buffett to invest for them and use that as a learning tool to expand their investments. Warren has averaged over 20% for the last 44 years, so he has the system down pretty well and he and his partners have been forthcoming about their methods so one can learn from the master. Fundamental analysis is fairly easy to learn, and the rules are simple to apply. This method requires the least time from you, but the best thinking, as you will need to use your imagination and your basic sense. A good place to start to understand this method is to read the annual letters to investors from Warren Buffett located on Berkshire Hathaway’s web site. This method appeals to conservative folks who find its primary proponent, Warren Buffett’s values line up with theirs.
Finally, is trend following. This is by far the most risky of the three strategies but allows for very rapid build up of capital. Many famous trend followers have made fortunes for themselves and people who allow them to invest for them (Dunn, Sekoya, Henry, etc.). This strategy involves setting up a strict set of trading rules, usually set up on a computer which alarms when trades are to be made. The trend follower does not care about anything except the pricing trends and allows for nothing other than that data to disturb his trading. This is not day trading as a singular trade, on average, will be held for 18 months. They trade stocks, currency, options, commodities, anything that has constant pricing that can be turned into a trend. They spend as much time short as long, meaning they could care less if the trend is going up or down. The key is to set up risk management rules and to not try to out think the rules, just abide by them. The folks whom developed this strategy (1970s) back tested their rules for hundreds of years before they settled on them. Most of them had strong math skills to use in creating the rules. A good book on this is Trend Following by Michael W. Covel. Be forewarned this takes extreme dedication and is a very active investment strategy. But it has shown to provide excellent returns over the long run.
Finally, are some hybrid strategies. For example, if you are practicing the buy-and-hold strategy for stocks you can sell covered calls on those stocks to up the overall return. This is a conservative option strategy that fits well with the conservative nature of the buy-and-hold strategy. Or you can use real estate as a way to gain cash flow which you then use for the buy-and-hold strategy. Or you can use real estate in conjunction with selling covered calls like Alan Ellman over at Blue Collar Investor. Or you can do what I do and invest in Berkshire Hathaway, REITs, and a real estate developer and add in small investments like selling covered calls.
All of these strategies have been proven to give double digit returns to their adherents. But they all require active participation and constant surveillance along with using one’s brain. Yes, and they all have risk associated with them because assuming some risk is the only way to get to a comfortable retirement unless you are born into wealth!
*****Remember this is only the rantings of someone who has done the research into wealth creation, not someone that is licensed to sell securities or real estate or one that the SEC would consider appropriate for giving out specific investment recommendation. Before making any decisions regarding your money, do the research yourself, learn about yourself, and learn to be comfortable making your own decisions and living with them. ******