Going Against the Conventional Investment Wisdom

First of all, I want to give everyone the disclaimer that I am not a registered financial advisor and I don't play one on TV. Therefore, I cannot legally provide financial advice and I will not do so. This is for informational purposes only and I'm not recommending any of my personal investment strategies to anyone else. Now, with that being said, I will outline some techniques I use for my personal investment strategy, without going into a whole lot of specifics. I generally go against the conventional investment wisdom that you are accustomed to hearing, although I do use both a conservative and a not-so-conservative strategy.

Most financial advisors put a great deal of emphasis on diversification. While this is probably appropriate for most people, I personally don't buy it. The idea is that it limits risk. While it does indeed limit risk, for me it also limits my upside potential way too much. Therefore, I basically disregard the whole concept. Most advisors will encourage investing for the long term. This strategy is generally successful in building wealth, but unfortunately for me, it wouldn't until after I'm old or dead. I invest for the short and intermediate terms.

I also do not buy or trade individual stocks. Instead, I buy and trade no-load mutual funds, including index funds. Even with the use of a deep-discount broker, commissions from trading individual stocks will add up and cut into my profits. True no-load mutual funds don't cost me anything to buy or sell. Besides, owning shares in a mutual fund is like owning shares of a lot of different stocks at one time without having to actually buy any of those stocks. Instead of buying individual stocks, I am buying classes or groups of stocks. I also don't have to worry about which stocks to buy or sell, as that job is being taken care of by the fund managers.

Now, let's talk about some guidelines I use specifically for my conservative strategy. I only buy funds that have earned a "Five-Star" rating from Morningstar (www.morningstar.com). They must also have a Morningstar risk rating of "low", "below average", or "average." In addition, they must have a Morningstar return rating of "above average" or "high." Also, they must be long-term winners, i.e., near the top of their categories in five-year and/or ten-year performance. I also require them to be "Lipper Leaders", as deemed by Lipper (www.lipperleaders.com), in the categories of "Returns", "Capital Preservation", and "Consistency."

In my mind, consistency is just as important as high overall return and capital preservation. An inconsistent or volatile fund can cause problems for short and intermediate term investors, even if its longer term performance is excellent. Here's the problem: Let's say a fund that I invested in went down 50% in the first year I owned it. It would have to go up a whopping 100% the next year for me to break even after two years. However, let's say it went down 25% after the first year. In that case, the fund would only have to go up 33% in the second year for me to break even. A 20% drop in the first year would need only a 25% increase in the second year to break even; a 15% drop would need only an 18% increase; a 10% drop would require only an 11% increase; and so on. Therefore, I stick with funds that have never gone down more than 10-20% in any one year. I prefer funds that have never had a losing year, but those are very hard to find.

What about my more aggressive strategy? This is the one that I'm using more and more often and is becoming more profitable, although I probably couldn't quit my job and make a living off of it just yet. Is it going to make me rich? Probably not. However, I hope it will eventually put me in a financial position to retire early. This strategy involves actively trading various no-load market index funds. The experts say you can't successfully time the market. I believe this is true when using the strictest definition of the term, "market timing."

However, I have been able to trade successfully with the short-term momentum already established by the market. Why no-load market index funds instead of individual stocks or Exchange Traded Funds (ETFs) that mirror various market indexes? Because no-load market index funds allow leveraging and short selling without the need for a margin account. Also, some of these funds allow twice-daily trading (which is important for exiting early on bad days). In addition, the fund company I use doesn't charge redemption fees for actively trading its funds. Most fund companies, even those that specialize in no-load funds, charge these fees.

Like I said at the beginning, I'm not going into great detail, especially about my more aggressive strategy. However, I should define some terms so all of this will make more sense to those who are novices in the world of investments.

What is leveraging? Leveraging, in this context, is the ability to buy shares of a stock or mutual fund and realize a multiple of its gain or loss during the time you hold it. For example, if you buy a fund leveraged at 2 times a given stock index and that fund goes up 20%, you realize a 40% gain. However, if it goes down 20%, you incur a 40% loss. With individual stocks or ETFs, you need a margin account to do this. With a margin account, your broker is loaning you money on "margin" at a rather high rate of interest to cover the leveraged (or extra) amount. Obviously, this could be very risky and costly. However, there are some funds that have this leveraging built in at no cost to you. These funds automatically give you one-and-a-half or two times the gain or loss of a given stock index.

What is short selling? Short selling is when you sell a stock (that you don't already own) immediately at its current market price while agreeing to buy it at whatever the market price will be at a fixed point in the near future. In other words, you are betting that the stock will be going down, so you can buy it for less than you sold it for. Have you ever heard anyone say "don't sell me short"? Well, this is where that term came from. Selling someone short is tantamount to treating them like a bad stock that you believe is going down. Yes, it's backwards of the normal process of buying and selling stocks. As with leveraging, you need a margin account to do this for individual stocks or ETFs. Your broker loans you money on "margin" (actually buying the stock temporarily), so you can sell a stock that you don't own yet.

Once again, however, the funds I use have this short selling mechanism already built in to them at no cost to you. For example, you can buy a fund that gives you the inverse performance of the Nasdaq-100 Index. When that index goes up 10%, the fund goes down 10%; conversely, when that index goes down 10%, the fund goes up 10%. There are even funds with leveraging and short selling built in to them, at no cost to you! For example, there is an available fund that goes up 20% when the Nasdaq-100 Index goes down 10%. Of course, that same fund goes down 20% when then the Nasdaq-100 Index goes up 10%. As you can probably imagine, these funds can be powerful tools for profit-making for those who know how to use them, but can be highly dangerous for those who do not.

For more information about any or all of these concepts and to find out what kind of investment is right for you, contact your financial advisor and/or do your own research. Hopefully, I have provided some food for thought as well as several resources that might be helpful to you when doing your own research.

Terry Mitchell is a software engineer, freelance writer, and trivia buff from Hopewell, VA. He also serves as a political columnist for American Daily and operates his own website - http://www.commenterry.com - on which he posts commentaries on various subjects such as politics, technology, religion, health and well-being, personal finance, and sports. His commentaries offer a unique point of view that is not often found in mainstream media.

---

Google News Updated : Wed, 08 Oct 2008 02:50:04 GMT Obama And McCain On Small Business - CBS News CBS News Obama And McCain On Small Business CBS News - 3 hours ago The fifth installment of the series examines where each candidate stands on helping small businesses. Supported the government bailout aimed at easing the credit crunch. Obama-McCain debate Question 5: What sacrifices Kansas City Star Ad Wars: McCain Dishonorable and Obama Untrustworthy Huffington Post Atlantic Online - UM Maneater - Politico - The Plank on TNR.com all 441 news articles Publ.Date : Tue, 07 Oct 2008 23:28:47 GMT Obama, McCain stretch facts in debate - The Associated Press Voice of America Obama, McCain stretch facts in debate The Associated Press - 48 minutes ago WASHINGTON (AP) - Democrat Barack Obama and Republican John McCain stretched facts, sometimes past the breaking point, as they addressed the financial crisis and more during their second presidential debate. McCain, Obama Laud Buffett When Asked About Treasury Candidates Bloomberg Obama-McCain debate Question 2: How will Kansas City Star MSNBC - USA Today - Detroit Free Press - New York Times Blogs all 344 news articles Publ.Date : Wed, 08 Oct 2008 02:01:16 GMT Ayers and Obama later worked on Chicago charitable boards together - CNN BBC News Ayers and Obama later worked on Chicago charitable boards together CNN - 1 hour ago By Drew Griffin and Kathleen Johnston CHICAGO, Illinois (CNN) -- More than 30 years ago, William Ayers was a fugitive leader of the Weather Underground, an antiwar terrorist group known for its bombings of police stations, the Pentagon and the US ... Connelly: My tea with a 'terrorist' Seattle Post Intelligencer What’s The Obama-Ayers Connection? KPHO Phoenix Town Hall - Chicago Reader - New York Times - Los Angeles Times all 134 news articles Publ.Date : Wed, 08 Oct 2008 00:55:44 GMT World markets mixed amid ongoing bank jitters - Forbes AFP World markets mixed amid ongoing bank jitters Forbes - 4 hours ago By PAN PYLAS 10.07.08, 5:55 PM ET World stock markets were mixed on Tuesday as banking stocks on both sides of the Atlantic took another pounding despite the US Federal Reserve's announcement that it will buy huge amounts of short-term debt in an ... TOPWRAP 15-Fed steps in but US stocks dive; UK to rescue banks guardian.co.uk Patrice Hill THE WASHINGTON TIMES Washington Times New York Times - AFP - Wall Street Journal - MarketWatch all 624 news articles Publ.Date : Tue, 07 Oct 2008 22:03:58 GMT Judge Orders 17 Guantánamo Detainees Freed - New York Times ABC News Judge Orders 17 Guantánamo Detainees Freed New York Times - 1 hour ago By WILLIAM GLABERSON WASHINGTON - A federal judge on Tuesday ordered the Bush administration to release 17 detainees at Guantánamo by the end of the week, the first such ruling in nearly seven years of legal disputes over the administration’s detention ... White House "Deeply Concerned" With Guantanamo Ruling Voice of America US judge orders Guantanamo Uighurs freed AFP Bloomberg - Financial Times - ABC News - Aljazeera.net all 692 news articles Publ.Date : Wed, 08 Oct 2008 01:49:29 GMT Fed's new tool: Business loan bailout - CNNMoney.com Christian Science Monitor Fed's new tool: Business loan bailout CNNMoney.com - 1 hour ago By Chris Isidore, CNNMoney.com senior writer NEW YORK (CNNMoney.com) -- The Federal Reserve announced a new program to help the battered market for short-term business loans - taking its closest step yet to lending directly to businesses. Fed's Credit Tactic Has Small Effect Forbes Fed, in emergency move, will lend to companies The Associated Press Bloomberg - MarketWatch - BusinessWeek - The Miami Herald all 1,833 news articles Publ.Date : Wed, 08 Oct 2008 01:33:46 GMT Bloomberg’s Gift to the People: Moi - New York Times Telegraph.co.uk Bloomberg’s Gift to the People: Moi New York Times - 1 hour ago By CLYDE HABERMAN An e-mail pen pal of mine in Alaska (no, not her, someone else) wrote the other day mentioning Marshal Philippe Pétain. UPDATE 1-NYC lawmakers to weigh bill raising term limits Reuters Bill to end term limits introduced in City Council New York Daily News The Associated Press - People's Daily Online - NY1 - WNYC all 434 news articles Publ.Date : Wed, 08 Oct 2008 01:08:24 GMT RSS Feed Reader Increased Website Traffic

PARLOT::Ebooks, Scripts, Websites, and more...

Adsense websites

In a Time of Need

As I take my leisurely walk with my dog through... Read More

HYIPs Investments or Scams?

High Yield Investment Programs (HYIPs) appear at first to be... Read More

Investing in Car Dealerships: How to Do It Right

The financial characteristics of the automobile dealership are attractive:". .... Read More

Evaluating A Money Manager

Scams and frauds are designed to take your money through... Read More

Bearish or Bullish?

If you are interested in stock investing and the stock... Read More

Boost Your Income With Financial Spread Betting

About 6 years ago I started to notice that certain... Read More

Choosing A Financial Advisor

With so many financial advisors trying to woo you with... Read More

The Dreaded Direct Question

(Please have a glass of water within reach before reading... Read More

Coca-Cola - A Value Stock?

There has been much talk lately about Coca-Cola and its... Read More

Trading Baskets Part I

Q. What is a basket?A basket is a group of... Read More

Protecting the Tax Advantage of Your Deferred Compensation

The American Jobs Creation Act of 2004 imposed strict new... Read More

Investing in New Zealand - Learn how to Find Unique Investment Opportunities

Investing in New Zealand might be much easier than investing... Read More

Retirement Plan Considerations Cheat Sheet for Small Business

RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More

Angels Investors and Their Networks

What is an Angel Investor? An Angel is usually a... Read More

Going Offshore For Asset Protection

There are a number of key reasons why individuals and... Read More

Buying Florida Investment Properties and Where Its Hot

Relaxing in Style: Florida Investment PropertiesIn Florida, relaxing in the... Read More

Out-Of-State Investors Check List of Questions

The following lists of questions are suggested questions to ask... Read More

The Benefits of Laddering Your CD Investments

If you've decided to stock some money away in a... Read More

Mutual Fund Selection Made Simple By Indexing!

Non-indexed mutual funds try to keep it secret that actively... Read More

Why Do You Want to Become a Online Trader?

Motivational guru Tony Robbins teaches that the reason for doing... Read More

Do You Need A Financial Planner?

No matter how much money you make, it pays to... Read More

Just Say NO to Your Stock Broker

We have all heard that slogan that started back when... Read More

Discipline in Investing and Trading

Discipline can be simply defined as your ability to follow... Read More

Variable Annuities

You know all the articles you read about annuities that... Read More

An Investment Real Estate Strategy Unknown To Most Is A Negative Amortization Loan

If you want to make the most of your personal... Read More