Diversity MBA Magazine - April 2008 - (Page 68) Achieving Wealth In The st 21 Century By Arn Bernstein It’s something we all dream of; choosing the right investments and making enough to take care of us the rest of our lives. But is it really possible in today’s economic climate? The majority of experts seem to feel it is, provided it’s done properly. There are a couple of schools of thought on investing. Some investment groups, such as Oxford Club’s Investment U, stress developing a strategy for the longterm. Instead of wondering where the market or economy are going to go, ask yourself how to get the highest return via the least risk, how to guarantee your portfolio will continue to increase in value, and how to protect your profits as well as the principal. The second pillar is knowing when to sell. Some investment services, such as Investment U, have a built-in point to do this that guarantees the protection of profits and principal. Here’s how it describes it: “We start all of our trading positions with a recommendation that you place a sell stop 25% below your execution price. As the stock rises, we raise the trailing stop. In other words, if you buy a stock at $20, your stop loss is at $15. When the stock hits $32, your stop loss (still trailing at 25%) will be at $24. As long as the stock keeps trending up, we’re happy to hang on. If the stock pulls back 25% from it’s closing high, we sell, no questions asked.” Another element of this is that while common sense dictates that one should cut losses early on should things begin to slip, few investors actually pull the trigger. The trailing stop strategy eliminates any uncertainty. Allowing portfolios to continue to grow without taking profits is risky at best. By not selling, an investor is opening themselves up to the chance of the profits not only decreasing but even disappearing, by actually turning into losses. Not having a sell discipline in place is investing by the seat of one’s pants, so to speak. A trailing stop is necessary, but so is the resolve to stick to it. The Four Pillars Investment U calls the strategy the Four Pillars of Wealth. The basic premise is that to invest successfully, there will always be a degree of uncertainty. Makings predictions on the market can be right, or wrong, and nobody gets it right all the time. The critical solution to guesswork is what it terms asset allocation. It differs from basic diversification in that it involves distributing investments not only in various market sectors or securities, but also in different asset classes. One example is high-grade bonds, which have actually increased when the market in general has fallen. Others include real estate investment trusts (REITs), highyield investments, inflation-adjusted treasuries and precious metals. Since different asset levels move in different directions, you can increase returns while keeping the overall volatility of your portfolio to a minimum. To learn about the basics, it’s recommended reading a book such as The Intelligent Asset Allocator, by William Bernstein. 68 How Much Is Enough? The third pillar is how much to invest in a specific stock. Obviously, this is affected by one’s net worth, basic investment experience and risk tolerance. Investment U recommends 3% of one’s equity portfolio – less if you wish to be conservative, a bit more if you feel aggressive. But never more than you can really afford to gamble with. In short, it doesn’t pay to w w w. d ive r s it y mb a ma g a z in e. c o m http://www.diversitymbamagazine.com
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