The blog post below raises an issue of how one should invest money. The best advice I can give is
Before you buy a stock, figure out what would cause you to sell.
The biggest mistake novice traders make is to sell when the stock goes down and buy when it goes up. This is a strategy guaranteed to lose money.
A better strategy for investing (its not the only one), is to invest in a “target retirement fund.” This has the advantage of diversification (stock market will not reward you for bearing diversifiable risk, so it is important to diversify), and rebalancing.
Rebalancing is a little bit more subtle. A typical target retirement fund would allocate (100-your age) to stocks (riskier) and the remainder to bonds (less risky). So for a 23-year old, the allocation would be 77% stocks, and 23% bonds. As you age the allocation shifts towards the the less risky asset.
Periodically, the fund “rebalances.” This means that if stocks have appreciated relative to bonds, they will rise above 77% of the portfolio, so the fund sells some stocks and buys some bonds, to bring the portfolio back to your 77/23 desired allocation. Notice that this strategy results in selling assets that have gone up, and buying those that have gone down, exactly the opposite of the strategy followed by Mr. Dumbass in the story below.
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ReplyDelete"A typical target retirement fund would allocate (100-your age) to stocks (riskier) and the remainder to bonds (less risky)."
ReplyDeleteIn the era of ZIRP, the bond allocations concern me.
Particularly for folks deriving the majority of their income from employment. Once an individual's career has matured, they receive regular periodic payments in the form of paychecks. Similar to coupon payments received by a bondholder. With employment income significant to many, they have in effect already allocated a significant part of their future to a low risk predictable cash flow. Very bond like.
Consider 100 - your age + expected career years remaining for stock allocation. For a 40 year old expecting to work another 20 years, that would be 100 - 40 + 20, 80% stocks 20% bonds rather than 60% stocks 40% bonds. For anyone under 30, this would result in 100% allocation to stocks.
The career expectation could be protected with term life insurance.
Just idle thoughts on the bond like aspects of a career, and not investment advice.
Obviously if anyone does buy or sell without any proper strategy or plans then it will only lead towards losses, I believe that we should definitely trade with proper planning. I am lucky to be working with OctaFX broker where I can get great news and analysis service, it is perfect to have because of the accuracy and I am certain to get results in my favor without even having to pay any money to them, so that’s just perfect for all!
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