Under we will go through the four key steps that are required to make you from being one of the pack into the world of better investment management using a strategy. The key being to be able to identify your strategy, verbalise it, measure it and be able to back it up with beliefs developed on market and economic knowledge. This is then your road map that leads you through the tougher times and makes the most with the good times with minimal decision making based on emotions or ‘intuition’.
Step 1: Write Down Your Strategy As A Process
The supervision consultant and author Dr . W. Edwards Deming mentioned “If you can’t describe what you are doing as a process, a person know what you are doing. ” This applies to many areas of existence but essential if you are talking about putting an Investment Strategies set up as it must be repeatable. If you don’t know what it is that you are carrying out or you just ‘go with the flow’ then it isn’t repeatable. Either decide to stick with such an approach or look at formalizing what it is you are doing by writing it lower and analysing.
A strategy should be able to be broken down into its component parts and be reviewable to verify that it matches your current long term objectives. That it provides a clear map for getting your way through the investment maze, especially during the more strong times. Equally it should give enough detail that is a central part changes it is clear what could or should be improved in your strategy.
Finally, it goes without saying that if you are a professional buyer then being able to show your clients a clear and written approach will invoke more confidence and develop a stronger enterprise. Even if things go awry the clients will have more trust in your ability to deal with it than if you just is very much winging it.
Step 2: Identify How To Incorporate Any Opinion You Have About How Investments Become Over Or Undervalued
It could be that you can’t clearly state what you believe the individuals are for making an investment over or undervalued. However there exists probably something that makes you believe you can make the markets work for you therefore you believe you can spot an opportunity based on the fact that they will increase or perhaps decrease in value. It is this that you need to be able to verbalise.
Will there be something that gives you an advantage over others? Do you have some certain sector knowledge? Do you get access to research that is restricted inside distribution? Or is there something else that you can use that gives you a plus and how are you going to make the most of this? Always bear in mind that markets move and it maybe that your advantage stops being a positive sooner or later or for a while, especially if others adopt the same strategy when you.
Step 3: What Market Conditions Does The Strategy Need?
It could be that your strategy is so robust that it will work well in any economic environment. However this is unlikely and there is an old adage in Investing that says: “The market can remain irrational more time than you can remain solvent. ”
The good investment supervisor can clearly identify what conditions bring the best returning for any given strategy. Essentially they can also identify just what market conditions are the worst for the strategy and therefore with needs to be stopped and swapped for another one or the period has to be sat out and wait for a shift back in favour of your strategy. What you choose to do will be based on your long term strategy nevertheless the critical element is knowing the strengths and weaknesses of your key methods and applying as appropriate. Indeed a portfolio composed from more than one strategy will provide some protection against significant industry shifts. An example would be to have a mixture of value and progress strategies.
Step 4: Can You Measure The Effectiveness Of Your Investment Approach?
How are you going to know if your trading strategy is effective? Greetings going to be sure that you are getting the best return you could? Merely showing some profits is not a good measure as although it shows the strategy works it doesn’t quantify that in terms of your long-term objective. You need to have a benchmark that will relates to your strategy.
There are two main types of standards which are relative and absolute benchmarks and both supply a valuable insight to the strategy.
A relative benchmark is something such as the market indexes which are passive measurements of the market efficiency of a collection of investment vehicles. An example is the S&P 500 List. An absolute benchmark on the other hand is a numeric target such as twelve-monthly return on investment.
Measuring and monitoring can be time consuming but simply by doing it can you be sure that you are at least in line with the market segments and making the most of your opportunities. There are numerous measures that can be used and several of the more sophisticated options are Treynor Ratio and the Sharpe Percentage which incorporate adjustments for risk.