Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 38)

Investment Strategies (part E)

by

Charles Lamson

Balanced Strategy

A balanced strategy seeks balance in its execution and goals. You could make the argument that a balanced strategy is nothing more than that area between growth and income, and you would not be wrong.

In Alpha Teach Yourself Investing in 24 Hours, Ken Little targets balanced strategy for the purpose of looking at how we can use a strategy that seeks a combination of growth and income. This is the subject of much debate in the investing community, because it looks for the big answer where there may be none.

JUST A MINUTE Self-knowledge is a powerful tool in building an investment strategy because it builds on your strengths and works around your weaknesses.

The problem is, there is no one best answer. The investment instruments we have to work with are not nearly as predictable as we would like to think. When you add in varying levels of risk tolerance and feelings about passive or active management, it becomes very confusing, very quickly.

No one knows you better than yourself. Little's book seeks to get you started on a quest for knowledge that will enable you to figure out what mix is best for you.

If you have access to the Internet, there are a number of sites that will let you set up theoretical portfolios and test them against real market data. This trial and error, done with pretend investments, will give you an opportunity to see how changing the mix works.

People who have entered retirement are good candidates for a balanced strategy, which might not be very distinguishable from an income strategy, depending on how it is configured. In addition, there are numerous balanced mutual funds that seek that balance for you.

Capital-Preservation Strategy

Little includes capital-preservation strategy in his book to look at how one might want to adopt an ultraconservative stance that sought only to preserve existing capital. (Hiding your money under the mattress does not count.)

PROCEED WITH CAUTION Removing risk from investing is to remove return. Except for the super-wealthy, this is a long strategy because inflation and taxes will soon put you in the hole.

These folks have foregone growth and income in exchange for the security that their capital will remain intact. Often this investor has a high net worth and is interested in passing on the "corpus" of an inheritance or trust.

For example, if you inherited $100,000,000 with the family duty to pass on the corpus to the next generation, you would want to make sure nothing touched the principal. Investing in government-secured bonds and other low- or no-risk investments would be your strategy.

Since most of us are not going to inherit a bundle from Uncle Fred, the widget king, we need a more practical application. One such application may be a very short-term need that had to be met.

For example, you are investing for your child's college education and $10,000 is your goal. You meet that goal with your income strategy, but still have six months to go before school starts. Do you leave the money in the income strategy hoping it will not go down?

My guess is that you would be more concerned about socking away that $10,000 than earning a few more dollars over the next six months. You might consider a high-quality bond, but frankly, what makes the most sense is to sock the money away in a savings account, a bank certificate of deposit or a Treasury bill.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 229-231*

END

JUST A MINUTE

Self-knowledge is a powerful tool in building an investment strategy because it builds on your strengths and works around your weaknesses.

PROCEED WITH CAUTION

Removing risk from investing is to remove return. Except for the super-wealthy, this is a long strategy because inflation and taxes will soon put you in the hole.