Investment strategies you need to start using
posted by Michael Olafusi , on ,
I hope you've been reading my Personal Finance series.
Today, I will be sharing with you Investment strategies I use and have hugely benefited from. I have used them across my Stock Investment account, Money Market Fund, Mutual Fund and High Yield Savings Account.
1. Dollar Cost Averaging (DCA)
Dollar Cost Averaging is simply buying a fixed Naira amount of an investment type every month. I use this on my Mutual Fund account with ARM (Discovery Fund), and since April 2011. And I also use it on my Stock Investment Account, I transfer a fixed amount of money into my brokerage account monthly.
The major advantage of this strategy is that it makes investing a habit. I don't struggle to keep aside money for investment monthly.
It's other advantage is that it alleviates your worries of buying at a market high. Since your buy is spread across many months, you'll end up buying at both market lows and highs. And in the end, you'll have bought at an aggregate price that is near the average of the market's vicissitudes. This benefited me greatly as ARM Discovery Fund went down in 2012 and came back up this year. I ended up buying more units while the price was down and experienced more gain when it went back up.
Most investments in Nigeria are DRIP enabled by default or give you the option in the investment account creation forms. What this means is that your interest and dividends will be re-invested on your behalf, you won't get them as cheques mailed to you. And it is a very good investment strategy, it grows your investment faster than if you were cashing out the dividends.
I have this running on all my investment accounts except my stock investment account.
3. Buy and Hold or Value Investing Strategy
In Nigeria, with the high brokerage charges you face for each stock transaction, this is the only strategy you should consider using. You simply can't be a day trader in Nigeria, you'll nearly always lose. I get charged over 6% for a round trip transaction (buy and sell). And if I consider the capital diminishing effect of the initial buy transaction charges, the effective charges can be as high as 10%.
Buy and Hold simply means look for the value stocks (those with strong fundamentals and prospects) and buy them at a reasonable price, then hold forever (on plan).
In buying a stock, I run through an elaborate analysis to verify that the company's numbers and prospects are good. I read it's annual reports (sometimes, cover to cover) and I rewrite the Income Statement to reflect the true state of affairs as indicated by the Balance sheet statement and Notes, if need be. I don't buy stocks that don't meet my strict requirements. I buy stocks to hold them through thick and thin, as long as the fundamentals are still right and nothing catastrophic has happened to its industry.
And those are the investment strategies I believe you need to start using. They've worked great for me and will for you too.