I was going to write a post about some really great investment strategies that would guarantee us all a life of freedom and untold wealth but sadly I couldn’t, because those strategies are really, really difficult to find on Google.
I’m sure they’re there, they are just very well hidden between trillions of forex black boxes and to be honest after the first page on $GOOG I gave up.
It’s actually much easier to write about crap investment strategies because there are so many of them out there. In the interests of not taking 12 days to write the post, I decided to go with some of the strategies more commonly used in the non-professional world.
So, these are my three favourite Worst Investment Strategies Ever.
1. Buy And Hold
Is buy and hold dead? I doubt it, but it probably should be.
Buy and hold is the definitely the laziest investment strategy ever, and tends to be appealing to ‘investors’ who look at the stock market as an alternative to putting their savings in the bank. They know they need to invest, but have no idea how and no inclination to learn so they buy bank shares or some other well-known stock and marry it, till death do them part.
There are so many problems with this strategy it makes me cry, but the biggest one occurs because of the typical mindset of the investor.
They buy the stock, watch it go up, and never lock in their profits which subsequently melt away. But they won’t sell, because in their mind they’re holding a $50 share, even though it’s now trading at $18.
Or, they watch the price fall straight off the bat, and continue to hold it because, “this is a long-term investment and the dividends are now yielding a whopping 7%!”.
Small point – it takes a lot of 7% dividends to recoup a 50% capital loss. Worth thinking about, especially because that 7% yield is now based on 50% less capital.
Also, those precious divvies are far from a sure thing and can potentially be reduced to zero if the CEO is having a rough day.
2. Writing Naked Puts
This is sometimes promoted as a clever way to buy shares at a bargain. And to be honest, I still find this appealing until I remember coming undone in 2008 – that was my most expensive bargain ever. Thankyou, Lehman.
The problem with this strategy is that you make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong. Pretty crap deal, if you ask me.
Writing Covered Calls
The only people this can possibly benefit are people who are already committing Crap Investment No. 1. In that scenario covered calls can actually work well in a sideways to slightly down market.
But otherwise, it goes against every investment rule there is. Letting profits run? Er – no. Managing risk? No, the downside is all the way to zero, less the few bucks in your pocket from the written call.
All it does is make a really crap investment a slightly better one in junk market. Which begs the question, why are you participating in a junk market?
You don’t have to, there are no rules that say you have to hang on through thick and thin. The thing, in my eyes, that sets the real investors (and traders, for that matter) apart from the wanna-be’s is the ability to recognise a junk market and adjust accordingly.
This single ability has the power to change everything. The buy and hold investor who sells when he sees his profits eroding has money ready to go when things start to look up again. The trader who recognises that the market is not great for their strategy has the reserves to find opportunity elsewhere.
In truth, the strategy you choose is one very small piece of the investment puzzle, but if you get it wrong it will ensure you never have the opportunity to see the whole thing come together. You can have the best psychology ever, but if your strategy sucks you are doomed from the start.
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