If one could time the market and sell at the top and buy at the bottom that would handle some of the most important parts of any investment strategies.
But how do you invest in-between those times? Looking around there are a million investment theories but what should one use as a sound investment strategy while trying to avoid in the dramatic declines or miss the major increases.
There are always more involved strategies, such as the collar strategy Mark Cuban used to make the most of his Yahoo! investment, but that may be beyond the average investor.
Because everyone is different and has different investment needs, many investment professionals stress the need to individualize strategies, and that can make sense, but too often that leads to people not knowing what to do without following someone else’s advice. In the end it may be adopting one
Warren Buffett and the S&P 500
Warren Buffett is viewed as one of the greatest investors of current times and many people have tried to replicate his investment style. But how would he recommend the average person invest. In a 2014 shareholder letter Warren Buffett outlined his strategy for his fortune should be managed for his wife after his passing.
My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
Allocation by Age
A rule of thumb investing was to subtract your age from 100 – and the result is the percentage of your portfolio that you should be in stocks. Under this rule, a 50-year-old would be 50% in stocks, a 30-year-old would be 70%, while a 70-year-old would be 30%. However with people living longer some have soured on this approach.
Many times, an investor determines their own strategy. James B. Stewart of the New York Times wrote in I Became a Disciplined Investor Over 40 Years. The Virus Broke Me in 40 Days that his strategy for trading wasn’t meant to be rigid, only to be rational.
I made a rule — never sell on a down day — and a corollary: Never buy on an up day…In the wake of the two-year bear market, I refined my strategy. I figured that if I bought every time the market average declined by 10 percent from its previous high — the standard definition of a correction — and then bought some more after each subsequent decline of 10 percent, then I’d never be buying at the top of the cycle.
Target Date Retirement Funds
A target-date retirement fund is similar to the Allocation by Age idea as it is mutual funds that rebalances over time so funds with farther out retirement dates are more heavily invested in stocks while those with shorter out dates are less invested in stocks. A basic set it and forget it approach.