The Key to High Returns Is a Disciplined Strategy By Ken Hawkins in Review

The act of allocating your resources, given the opportunity, to gain future benefits, is a basic human trait. No matter what state of mind you are in, you are always striving to achieve exponential results on your invested time, money and efforts.

The investment however, needs to be thought out carefully because if you are not careful, you will end up depleting your available resources. What prompted the need of investment personnel is their access to a well-thought and carefully strategized process. If you think about it, investment strategy is merely the result of research and diversification, founded on the Warren Buffett's good investing principle, capped with a cold-calculated emotional state.

Consider the process of tending a garden, you need to take care of it before expecting flowers and plants prospering there. The investment is the same, you have to work for effective investment strategy.

Strategic Asset Mix

The strategic asset mixed is a well-thought diversified asset allocating strategy, where your investment is divided into different asset classes like securities, bonds, stocks etc. and then this portfolio is projected over the period of investment, limited by the risk/reward tolerance and investor goals. The investor makes the call here and no co-relation between asset classes is kept to ensure that there is no overlapping in portfolio.

The strategic asset mix also needs rebalancing over a period of time owing to the increase (bullish) or decrease (bearish) in the current strategic mix. The rebalancing is needed because an equity of 30 % may rise up to 40 % or decrease to 25 %, so to keep the strategic asset mix, it is advised to sell or buy the equities.

Tactical Asset Allocation

The tactical allocation, like the name suggests, attempts portfolio allocation on the basis of forecasting. It takes a specific trend into consideration, analyzes the effect of the trends and owing to the information it adds value to outperforming classes (overweighting) and decrease the weight of underperforming asset classes (underweighting).

Security Selection Strategies

There are dozens of strategies when you are looking to the allocation of portfolio.

Some strategies take capital’s growth into account, and invest with companies or equities that are doing better than the most of their competitors.  To look for a stable growth based strategy, there are a few things that are taken into account; the historical earnings, the forward earning plan, management’s control and the potential of the asset to double in 5-year period

Another option is to take value of the stock into account and invest where the stock’s purchasing value less than intrinsic value. The strategy is not widely considered because of the fact that most of the investments are done on the basis of present growth.

In some cases, the capitalization on the stocks (momentum) is taken into account. An investor looks for an uphill trend, assuming that the trend is likely to go down, and invest with the momentum of the securities.

Another example of strategies would be to consider the possibility of a top-down or bottom-up approach.

The top-down investment take the results into account and then divide the portfolio into various components accordingly. Whereas the bottom-up approach takes the value of stock into account and move up to the bigger picture scenario.

The need of strategy

If you consider the over process, the strategy is a necessity. Without thinking a process thorough, you are most likely to get stuck and may not be able to survive the consequences. Rationally, having a strategic advantage trumps jumping in blind.

Developing or Borrowing?

If you take a moment and consider your life as an example, everything you are doing is a part of a bigger construct, that you want to achieve. Now, on a more competitive level, the struggle isn’t always enough, the importance is the achievement itself.

In investment, a strategy is of value, when it works for you. More so, it is always advised to lay out your own path. The strategy needs to be based on economic growth, policies, interest rates and market trends.

Due to the complexity of the strategic process, it is often advised to delegate decision making to a trustworthy financial advisor, who has the time and resources to manage your portfolio effectively and efficiently.

Head over to the Investopedia.com for Source article.