Tag: investment strategy

  • Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing – Why Should We Do That?

    Investment Portfolio Rebalancing - Why Should We Do That?
    Even if you’re a less aggressive investor, you should rebalance your portfolio at least once a year.

    By Guy Avtalyon

    You invested your hard-earned money for the long term, you added your lovely stocks, bonds, whatever, and thought everything is done and suddenly somebody told you’ll need investment portfolio rebalancing. What? Should you find an accountant? What you have to do? How to perform that investment portfolio rebalancing? What does it mean, at all?

    That is the main key, the fundamentals of investing. You have to do two main things: building it and investment portfolio rebalancing. 

    The investment portfolio is a collection of your investments. You hold stocks, bonds, mutual funds, commodities. The allocation of the assets you own has to be done based on your risk tolerance and your financial goals. But nothing is finished with the moment you bought your lovely assets. It is just a beginning. After a few years or sooner you’ll notice that different assets generate different returns and losses as well. Some stocks may have nice and high returns, so they become a large part of your portfolio. Much bigger than you wanted. 

    Assume you built up a 60/40 portfolio where 60% were in stocks. But after some time, you found that the value of those stocks represents over 80% of your portfolio’s overall value. What you have to do? Honestly, it is the right time for investment portfolio rebalancing.

    Investment portfolio rebalancing means that you have to adjust your investments, you have to change the asset allocation of the portfolio to obtain your desired portfolio outlook.

    Why is investment portfolio rebalancing important?

    It will help you to keep your desired target asset allocation. In other words, to keep the percentage of assets you want to hold adjusted to your risk tolerance and to earn the returns you need to reach your investment goals. If you hold more in stocks, you’re taking on more risks since your portfolio will be more volatile. That might have a bad influence on your portfolio because the value will change with changes in the market. 

    But stocks look like a better investment than bonds due to their ability to outperform bonds as a long-term investment. That is the reason to hold more stocks than bonds in your portfolio but as a reasonable portion to avoid additional risk.

    In periods when the stock market performs well, the portfolio’s money value that’s come from stocks will grow along with stock price rise. We already mentioned this possible scenario when your 60% of holdings in stocks rise to over 80%. This means your portfolio can become riskier. So, you’ll need investment portfolio rebalancing. How to do that? Simply sell stocks until you manage them to represent 60% of your portfolio. For the money received from that selling, you can buy some less volatile assets such as bonds, for example. 

    The drawbacks of investment portfolio rebalancing

    However, there are some problems if you rebalance your portfolio during the time when the markets are doing well. Even more, it can be hard to sell stocks that are doing well, they are your winners and their prices might go even higher. What if you miss huge returns?

    But consider this. What if they drop and you lose an important amount of money? Are you okay with that? 

    Remember, every time you sell any asset that is an excellent player, you are actually locking in gains. That’s real money and you can use it to obtain some stocks that are not such a good player but you’ll buy them at a bargain. Do you understand what you actually did? You sold high and bought low. You’re every single investor’s dream. You made it happen! 

    The real-life example 

    Our example of rising to 80% is rather drastically than a realistic one. Investment portfolio rebalancing ordinarily means selling 5% to 10% of your portfolio. We are pretty sure you are able to choose 5% of your winners and to buy some current losers but in the long run also winners. Investors usually buy bonds instead of stocks when rebalancing their portfolios. 

    Investment portfolio rebalancing is important because it provides you balanced asset allocation and, what is also important, in this way you’ll avoid additional volatility of your portfolio. If you’re the risk-averse type of investor this added risk might produce bad investment decisions. For example, you might sell stocks at a loss.

    Investment portfolio rebalancing is the best way to follow your financial plan and obtain the best returns adjusted to your risk tolerance. Anyway, you don’t need to be overweight in stocks because the markets are cyclical, and it could be a matter of time when the next reverse will come.

    Why rebalancing your investment portfolio?

    Let us ask you. Are you having a car? Do you change the oil or broken parts from time to time? The same is with your investment portfolio even if it is the best created. As we said, the markets are cyclical and some parts of your portfolio might not play well in every circumstance. Why should you want to hold a stock that isn’t able to meet your investing goals or you bought it by mistake?
    It isn’t hard to rebalance your portfolio, at least once per year. In short, that is investment portfolio rebalancing. If you think your investment portfolio is well-diversified among asset classes, just think again. Maybe it is diversified among asset classes but is it diversified within each asset class?

    For example, why would you like to hold only Swiss biotech stocks? There is no reason. Moreover, it can be dangerous. It can hurt your investment portfolio a lot. It is better and safer if you hold a mix of different stocks, domestic and foreign from different sectors.

    What if some of the investments grow in value while others decline? 

    In the short term, it is good. In the long run, it can be a disaster. That is the reason to rebalance your portfolio promptly and properly. Otherwise, your portfolio will be hurt as well as your overall returns.

    For example, you own 50% in stocks and 50% in bonds. Sometime later, your stocks performed unsuccessfully and their value is lower now, but bonds performed outstandingly. So, what do we have here? Bad performers – stocks at lower value and bonds as excellent players at a higher value. Would you think to change the proportion in your portfolio? Of course, you would. So, what do you need to achieve that? 

    Let’s examine a different mix. For example, you may rebalance your portfolio and now it will be 40% in stocks and 60% in bonds. But what is the consequence if you don’t rebalance your portfolio and stay with your initial mix? You will not have enough capital invested in stocks to profit when stocks come growing back. Your returns will be below expected.

    What if stocks were growing in value while bonds did unsuccessfully? Or, what if your portfolio turned into a collection of 60% stocks and 40% bonds, and quickly the stock market dropped? You’ll have greater losses, much bigger than it is possible with rebalanced the 50/50 mix. In short, you had more money in stocks. Your long-term gains are in danger.

    To make a long story short, when rebalancing, you have to cut the over-performing stocks and buy more underperforming assets. The point is to sell overvalued stocks and buy less expensive but with good prospects. Do you understand this? We came up again to the winning recipe: buy low, sell high.

    How often should you do that?

    The answer is short, once or twice per 12 months mostly. Markets are cyclical and unpredictable. However, if you rebalance at an uncertain period of the year you’ll put your money at risk. Never avoid rebalancing your portfolio after significant market moves. Follow a 5-percent rule. Your investments should be within 5% of where they were when you build your portfolio. For example, if your initial portfolio was with 60% in stocks (you were smart to buy good players) and after several months they changed to 65% or over, it’s time to rebalance. In case you weren’t so smart and you bought poor performers and they changed to 55% or below, it is also time to rebalance. You have to prevent your portfolio from fluctuating more than 5%.
    That’s the whole wisdom.

  • A Bottom fishing As An Investment Strategy

    A Bottom fishing As An Investment Strategy

    A Bottom-fishing As An Investment Strategy
    The most popular bottom fishing strategy is value investing but traders also use technical analysis to identify oversold stocks that may be winning bottom fishing possibilities.

    Bottom fishing as an investment strategy refers to the situation when investors are looking for securities whose prices have lately dropped. Also, that are assets considered undervalued. 

    Bottom fishing as an investment strategy means that investors are buying low-cost shares but they must have prospects of recovery. This strategy also refers to investing in stocks or other securities that dropped due to the overall market decline. But they are not randomly picked stocks, they have to be able to make a profit in the future. Well, it is general hope.

    Buy low, sell high

    We are sure you have had to hear about the old market saying “buy low, sell high” as the most pragmatic and most profitable strategy in the stock market. But, also, it isn’t as easy as many like to say. You have to take into consideration several things while implementing bottom fishing as an investing strategy. Firstly, you’ll be faced with some traders claiming that it is an insignificant strategy. The reason behind their opinion is if you are buying the stocks that are bottoming you do that near its lowest value.

    The point is that almost every stock is a losing one. Usually, some momentum traders and trend followers will support this opinion. Where are they finding confirmation for this? Well, traders tend to sell to breakeven after they have been keeping a losing stock for a short time. They want to cut losses and that’s why they are selling, to take their money back and buy some other stock. Traders are moving on.

    Overhead resistance will affect the way a stock trades but it is expected when using this strategy. Moreover, overhead resistance isn’t as inflexible as some investors believe. 

    Bottom fishing is an investment strategy that suggests finding bargains among low-priced stocks in the hope of making a profit later.

    What to think about while creating this strategy

    The most important thing is to know that you are not buying the stock just because it is low-cost. Lower than ever. The point is to recognize the stocks that have the best possibility for continued upsides.

    Keep in mind that buying at the absolute low isn’t always the best time to do so. Your strategy has to be to buy stocks that have a chance of continued movement. Stock price change may occur on the news or a technical advancement like a higher high. A new all-time low can cause a sharp bounce if traders assume the selling is overdone. But it is different from bottom fishing. Bottom fishing as an investment strategy has to take you to bigger returns.

    Not all low-cost stocks are good opportunities.

    Some are low with reason, simply they are bad players. For example, some stock might look good at first glance but you noticed one small problem. Don’t buy! When there is one problem it is more likely that stock has numerous hidden problems. There is no guarantee that low stock will not drop further.

    Further, for bottom fishing strategy, you will need more time to spend than it is the case with position trading, for example. You have to be patient with this strategy. You are buying a weak stock, and they became weak due to the lack of investors’ interest. Do you know when they will be interested again? Of course, you cannot know that nor anyone else can. When you want to use a bottom fishing as an investment strategy you must be patient and have a time frame of months, often years to see the stock is bouncing back

    If you aren’t psychologically ready to stay with these trades for a long time you shouldn’t start them at all.

    The bottom fishing strategy requires discipline

    If you want to practice bottom fishing as an investment strategy you will need discipline. It requires extra effort. It isn’t easy for some aggressive traders to hold a stock for months and without any action. We know some of them that made a great mistake by cutting such stock just because they were bored. If you notice you are sitting in stocks that are dropping lower on the small volume you still can exit the position. The losses might add up quickly, so you’ll need to set a strong stop loss to avoid it. Even if you hold a stock paid $1. It can produce big losses over time if you don’t have at least basic risk management. Stop-loss and exit points are very important in this strategy.

    The two main types of bottom fishing

    There is the overreaction and the value. For example, the news of some company’s problems may cause a lot of traders eager to enter for a sharp recovery. The stock suddenly had a sharp decline but they may think the market overreacted and the stock will bounce quickly. That could be faulty thinking but what if the long-term bottom fishers start to buy that stock too? The company’s problems are temporary and as times go by, could be forgotten. 

    The point is that the bottom fishing on the news or even earnings is a good opportunity to trade a bit of volatility. But you have to be an aggressive trader and able to play the big fluctuations. These short term trades can easily become investments if you don’t pay attention to it. Before you enter the position you must have a solid trading plan with defined entry point, stop-loss, and exit point. Optimize your strategy before you jump in. There is one tricky part with cheap stocks – they can become cheaper.

    The essence of bottom fishing as an investment strategy 

    Bottom fishing is when you try to find the bottom of a stock that has a higher price. Let’s say a stock was at $200 and now it is at $20. When you try to bottom the fish stock you’re actually trying to catch its bottom and buy it and provide it to go to the upside. In simple words, you want to get a good deal, to obtain the lowest possible price or bargain on the stock. But, if you want a good bottom fishing you must understand how it works. There are too many fresh traders starting bottom fishing but ending up with stock lower or never getting out from that low level. They are spending years stacking in bad investments. Also, their money becomes locked in such bad investments. 

    A real-life example

    Nowadays, we have a big selloff in the stock market. It is a great opportunity to buy some stocks that were very expensive since they are much lower now. A high priced stock has the drawback. Everyone would like to buy but have insufficient capital. That’s why the trading volume of such stock can be small. And suddenly due to some unfortunate event, the price is going down. Buying these stocks is a very good opportunity because they have the chance to go back up to the top. But it is hard to catch the bottom for these stocks. So many investors push up the price in the hope to get out at a higher price.

    Are they right or wrong? It is obvious they’ll have to sell these stocks when they start to come back up to reduce their losses. That is the main disadvantage of bottom fishing if you don’t do it accurately.

    Bottom line

    If you want a proper approach to the bottom fishing, you’ll have to watch for higher highs and higher lows. When you notice in the chart that a trend line is moving up off of a bounce you’ll see the real bottom. Well, you might not catch it at the lowest point, but you’ll catch it in a range of 5% or 10% which is a good deal for long-term investment. That can be a good strategy for investors willing to hold a stock for several years.

    For example, the stock price had a sharp decline and fell from $300 to $100 per share over three days. You could determine it was due to market conditions. So, you are buying 10 shares for $1.000. Next week, the price returned to $300 per share. What are you going to do? Sell, of course. You can sell the share of stock that you purchased for $1.000 at $3.000 (10 shares at $300 each) and make a profit of $2.000. Really not bad.

    Bottom fishing as an investment strategy is attractive for boosting portfolio value. Also, it is good for fast making profit while the volatility in the market is present. But, keep in mind, it can be risky because you can’t be 100% sure how the stock or market will go, how the price will run as a result of investors’ behavior, or how the particular company will survive the problems in the global economy.

  • How Do Dividend Paying Stocks Work?

    How Do Dividend Paying Stocks Work?

    How Do Dividend Paying Stocks Work?
    Dividends may be a sign of good stock but never invest in some stock just because of dividends it pays.

    By Guy Avtalyon

    The dividend is like interest on a loan. A company that earns real money every year operates with it on three options. First, the company can reinvest earnings to make new products, find more customers, or to make business more efficient. Some companies can buy back their stock in order to own more of the company and more profits. The third way is to return some of the money to shareholders through dividends. It is very important to understand how dividends work. Stocks that pay dividends can be great to hold.

    Dividends are like interest on a loan. Assume you loan your relative $1000 for a year at 5% interest. You expect to get back your $1000 plus that 5%, which is  $50 more. The dividend is that except the $1000 stays in the company because you still own part of it. It’s your part of the profit the company made.

    Unfortunately, not all companies will pay dividends. Some companies don’t make the profit and they can’t pay out anything. Other companies flow all of their money back into the company to grow faster. The rule is there is no rule. What works for one business doesn’t work for others.

    Is investing in dividends a good choice?

    I know some people who like to receive dividend checks. For instance, some reliable companies may payout every three months. Even if the share price has small moves every year, investors still make money from these dividend payments and they don’t have to sell their shares to get that money. The check comes at the end of a certain period.

    This money gets paid to all shareholders, no matter how many shares they own. The retiree who owns one share of some company gets the dividend in the same way as the wealthy hedge fund manager. The reliability of dividends gives them attractivity in investment.

    Do Stock Pay Dividends?

    High dividend-paying stocks have rates of 5%, 10%, or even more.

    Why they are so high? It is simple to explain. Let’s see this simplified example.

    A company with a share price of $100 which pays a dividend of $1 per share every year has a dividend yield of 1%, while a company with a share price of $10 which pays out $1 per share every year has a dividend yield of 10%.

    Notice that the price you pay for a stock and the growth of the business over time determine how much money you make on that stock. Keep in mind there’s no shortcut to investing little money with high returns. Unfortunately, but that’s true.

    The easiest way to find if a stock pays dividends is to look at any stock research site. You will find a dollar amount for the latest dividend announced, the annual amount paid, and the current yield. Always check the dates. The point is that stock may pay out one quarter and not the next.

    Is it profitable to invest in the high dividend-paying stocks?

    High dividend-paying stocks are paying more than the average dividend rate. Companies that pay high dividends are considered as good companies. But they may have some other reason like to attract investors to drive up the share price. It also may be a sign that the share price has dramatically gone down recently. Sometimes this means the stock is on sale or that the company is in trouble. You can’t know this just by looking at the share price or how high is the dividend amount. You have to have better information about the company’s business and its current financials.

    The company must choose to pay a dividend and the amount paid may vary. Not all companies will regularly raise the number of its dividend payments.

    Is investing in stocks that pay dividends a good strategy?

    Yes, especially if you want regular cash coming in reliably. Reliability is the keyword because dividends aren’t guaranteed. You still have to do your research. It is better to buy great companies, not just stocks that pay the highest dividends per share.

    High dividend stocks are not necessarily a good investment. Pay attention do they pay them every year, every quarter or does a certain company follow a regular schedule for the rise of its payment amount. It is possible to make more from dividends every year per share than you initially paid for the stock. Keep in mind this the tricky part of a dividend yield of stocks; it’s always calculated relative to the current price, not what you paid. A company that pays a huge dividend is a warning sign. How does the company plan to maintain its payment strategy? Is this a temporary trick to raise the stock price to fake levels? Always think about reliability.

    Does value investors make money from high dividend-paying stocks?

    Dividends are excellent. And value investing looks for underpriced stocks.

    “What are the best stocks to invest in?” or “What are the reasons to invest in a company?”, can be the questions you ask yourself. In that case, dividends may be a sign of a good stock. But not all great stocks pay dividends, indeed. Some never do. Some pay from time to time. It depends.

    If you pick a powerful company that gives you a check every quarter and if the price is right relative to the value, then you have no problem. That gem belongs to you.