Sunday, October 18, 2009

Stock Market Investment Strategies

Stock market investment strategies are like opinions, but not everyone has one. To invest in stocks without any investment strategy is to invite frustration into your financial life. If you want to make money in stocks, start by defining how you intend to play the stock investing game. Consider these three investment strategies.

To put things into prospective let's consider the 10-year period from 1999 through October of 2009, and what happened to the stock market as measured by the most popular stock performance indicator in the world, the Dow Jones Industrial Average (the DOW).

The DOW first hit 10,000 in 1999. In October of 2009 it was at 10,000 again. The stock market took investors for a wild ride that took them nowhere after 10 years. Stock investing was a losing proposition and was frustrating for most people.

If you want to invest in stocks and relax a little, its time to make a basic decision in terms of investment strategies. How are you going to play the stock market? You can play short term as a trader or speculator. At the other extreme you can just buy stocks and hold them. And then there's a third choice.

Few people really make money when they invest in stocks on a short-term basis. Traders have their good days, but few profit from market swings consistently. Besides, short term speculation is at least a part time job that requires time, effort and experience.

At the other extreme, buy-and-hold is a simple investment strategy and requires virtually no effort. This investment strategy has generated long term returns in the stock market of 10% a year, over the long term, for the past 50+ years. Not so in 1999 through 2009. For ten years stock investing the easy way produced little more than acid indigestion for investors.

I suggest you kick a field goal and split the uprights right down the middle. Don't try to make money in stocks with short-term speculation; or by just buying, crossing your fingers and hoping for the best.

There have always been cyclical bull and bear markets, and markets have always gone to extremes from time to time. Recognize this, and pay attention to stock prices. By checking the DOW just once a week you can get a feel for what's happening in the world of stock investing.

When you see extreme price movements it's time to act. How can you spot extremes? Get familiar with historical stock market data. A good place to start: a long-term chart of the DOW.

For example, by the year 2000 it was obvious that stocks had gone too far too fast. The only thing keeping them going up was greed. Taking emotion out of the picture, any rational being could have seen that stock prices had gone to extremes. The rational thing to do was to take some money off the table.

Or, look at the stock investing scenario in early 2009 with the DOW having fallen 50% in a few months. Was this a time to step up and buy stocks, or was the world as we know it coming to an end?

Don't view the stock market as rocket science or some other complicated thing that you can't understand. Learn the basics and follow the market on at least a weekly or even quarterly basis. Your basic investment strategy: lighten up on stocks when it looks like they've gone up to extremes. Step in and buy when there's blood in the streets.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to

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By James Leitz


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