“Investing for Dummies” During Difficult Markets

December 4, 2014 | By Steven DiGregorio

Investing in Difficult Markets

Everyone’s financial situation is different. What may be good advice for a 21-year-old likely is not be the best advice for a 65-year-old. Some investors may be willing to accept portfolio risk while others look for safety. While some may be able to muddle through, others may need a professional financial advisor to be their guide.

But there are some basic things every investor should keep in mind:

Diversification – You’ve heard the expression “Don’t put all your eggs in one basket.” The same holds true for investment portfolios. If all your investments are in the same area or category, and that category takes a hit, you’ll likely absorb all of the damage. On the other hand, if your investments are spread out over different categories, then a big hit in one category could have a very little effect on you. For that reason, it makes sense to divide holdings among stocks, bonds, real estate and cash.

Asset allocation – Simply put, this is the strategic approach to diversifying.  Generally, the older you are, the less risk you want to have in your portfolio, since a loss will be harder to make up over time. So those that are older may want more bond holdings in their portfolio, because bonds are considered less risky than stocks, in most markets. On the other hand, younger investors may be willing to assume more risk and allocate a greater percentage to stocks in the holdings in hopes of greater gains over time.

The slightly more savvy go even further, dividing stock holdings between large, mid or small-sized companies or  spreading the risk out to less correlated sectors like healthcare, transportation, technology and energy.

Dollar Cost Averaging – Purchasing investments at regular intervals with a fixed dollar amounts has advantages. This tends to reduce the impact of market volatility in their portfolios.

Let’s assume you have $150/mo to invest.

Month 1 – You buy 6 shares of the stock at $25/share.
Month 2 – You buy 10 shares of the stock at $15/share.
Month 3 – You buy 5 shares of the stock at $30/share.

Over three months, you have 21 shares with a total cost of $450, averaging just over $21/share.

More shares are purchased when the price is low, and fewer are bought when it is high, so the average price per share goes down over time. Although risk does not completely disappear, this strategy reduces volatility risk.

Kicking it Up a Notch – Now for savvy investors, market downturns mean opportunity, a chance to buy stocks with good potential for growth at bargain prices. This is where research and strategy come into play. It also requires learning about more strategies like:

  • Understanding the difference between a market order and a stop order.
  • Knowing the difference between growth stocks and value.
  • Learning what option contracts are – The right to buy or sell a stock at a predetermined price.
  • Understanding market metrics like Price to Earnings ration (P/E).

There are many more strategies and theories, from technical chart patterns to option straddles.

If becoming a full time student of the market is not something you can afford the time to do, consider hiring a Registered Investment Advisor (RIA). That is, a professional that manages your investment portfolio for a fee as opposed to a commission. This way there is no underlying agenda to “sell” you something that may not fit your needs. In the end, engaging a professional to handle the investment management of your portfolio can help your assets to grow and give you the piece of mind to sleep soundly at night.

The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.  

The views and opinions expressed herein are those of the author and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

 

Tags: asset allocation, asset classes, bonds, difficult markets, diversification, dollar cost averaging, investing, investing for dummies, option contracts, options, portfolio, real estate, registered investment advisor, RIA, shares, stocks

STEVEN M DIGREGORIO is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.
Connect with him on LinkedIn.
Back to Results | |