- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
Buy and hold or technical analysis? Why you need an investment plan
Devising an investment plan will help you achieve your investing goals.
Whether you follow a Buffett-style buy and hold approach, or adopt technical analysis, learning how to invest and devising an investment plan will not only help to crystallise your short and longer-term financial goals and objectives, but also dramatically improve your ability to achieve them.
It can be incredibly empowering to comprehensively review your current financial position, and if you do, you’re more likely to develop an investment plan that’s custom made for your specific requirements.
Understand your current financial situation
Before devising an investment plan, it’s important to have an accurate picture of your cash flow, including income, regular outgoings – especially any discretionary spending – and your capacity to save/invest surplus money. "Do not save what is left after spending, but spend what is left after saving", is a handy piece of advice from Warren Buffett.
Remember, all good investment plans will have one aim in common, wealth accumulation over time. Based on the ‘principle of compounding returns’, an investment earning 10 per cent annually doubles every 7.2 years.
The right investment plan for you will depend on a myriad of factors – most importantly your age, earnings and existing assets – which have a direct bearing on both your investment time-horizon, and risk/reward profile. While cautious investors would also like above average returns, their need for wealth preservation is greater than that of more aggressive investors who can afford to take bigger risks in pursuit of higher gains.
As a prudent investor looking for both capital growth and income, you’ll want to diversify your exposure to key asset classes like shares, cash, property and fixed interest. And if like most investors, you have a moderate tolerance for investment risk, and are investing for long-term wealth creation, it’s important to balance your investments to avoid over-exposure to any single asset class.
That’s because investment markets, whether in shares, property or cash, typically run in cycles (like the broader economy). So by offsetting better performance from one asset class against worse performing assets, you can smooth out your returns.
While many macroeconomic and industry-specific factors influence a company’s earnings performance, a lower cash rate environment – which is bad for fixed interest investors – is typically good for those invested in listed stocks as the cost of (corporate) borrowing becomes more affordable.
Economic indicators drive market sentiment
As an informed investor, it’s equally important to understand primary economic indicators and how they will impact different sectors of the economy. You’ll get a good insight into any trends developing within the economy by monitoring key pieces of data like gross domestic product (GDP), interest rates, unemployment, inflation, the Australian dollar, the balance of payments and the current account deficit.
These overall trends will fashion the market sentiment dished out to the asset classes you’re most likely to invest in. So by keeping abreast of the global and local economy, you’ll be better positioned to actively review and tweak your investment portfolio in light of those sectors that will either benefit or suffer going forward.
Instead of putting all their (investment) eggs in one basket, balanced investors typically divide their portfolio between cash, fixed interest, shares and property. Exactly how much of your portfolio is allocated to each asset class should directly reflect economic conditions and investment prospects, plus your requirement for investment-generated (or passive) income. Also take into consideration how quickly you may need to convert investments back into cash (liquidity requirements).
For example, with cash rates barely keeping pace with inflation, there’s been a corresponding return to equities. But during the Global Financial Crisis (GFC) the portfolios of most investors were seriously overweighted towards cash, with many spooked into sidelining the share market altogether.
Ironically, this decision resulted in mixed blessings, and a look at past performance explains why. While different asset classes perform better at different times, shares, despite their innate volatility, historically outperform other asset classes.
Admittedly, there have been shorter periods when cash and bonds have outperformed shares. But over the longer haul, history shows that shares have delivered better returns, especially once tax benefits (like dividend imputations) are factored in.
Shares add risk
According to research by Goldman Sachs, average returns between 1995 and 2012 saw listed Australian shares deliver 10.93 per cent, while cash and fixed interest delivered 5.63 per cent and 7.88 per cent respectively.
But remember, to get the (potentially) higher returns that shares typically offer, means accepting higher risks than holding cash does. So do your homework and never buy shares on tip-offs or unsubstantiated rumours. And while it’s important to stay ‘in the market’, that doesn’t mean buying stocks and parking them in the bottom drawer indefinitely.
Similarly, while a gearing strategy – borrowing from a broker or bank to buy more shares – can accelerate your wealth creation, it means taking on even greater risk. Don’t forget the value of shares can go down as well as up, and if it falls below a set loan to value ratio, you may have to put up the additional cash. So don’t borrow more than you can afford to service.
For the shares component of your financial portfolio, one approach is value investing – focusing on the very best companies and buying those shares at prices less than the business is worth.