Over the past few years several stock investment themes or approaches have gained in recent popularity, especially with the turmoil in the markets in 2001 and 2008.
These approaches focus on making money in the markets knowing that market volatility has increased over the past decade.
With the advent of computerized trading by the big institutional players and the ease of online investing for the retail investor, more and more transactions are surging through today?s markets.
We are experiencing greater connectivity to global markets not only with investors being able to access these markets, but more importantly with more and more businesses tapping into the global market.
This creates both greater opportunity, for those who know how to make money from the market?s volatility, and fear, for those hoping the market will deliver a steady return over time.
The traditional buy, hold and pray model of investing worked well before the turn of the century. However, if you had continued to use this popular approach to investing during the past decade, you would have probably been disappointed with your overall results.
Unfortunately, the first decade of the 21st century, aptly named ?the lost decade? by stock investors, showed no growth for investors using a traditional ?buy and hold? portfolio of well diversified equities.
What has transpired in recent years in the investment community is a greater push towards capitalizing on the market?s volatility or mitigating its effects.
Here are three thematic approaches that are gaining ground as the new playing field for stock investing evolves.
1. Buy and Hedge
The basic premise behind the buy and hedge approach to investing is to buy insurance protection for your core holdings through the use of options.
Typically, the buy and hedge investor will purchase stocks or ETF?s that can be protected by buying puts on all or a portion of the holdings. In effect, you are buying some downside protection should there be a major decline in the stock market. Put buying is the most common option strategy used for hedging one?s investments.
With protection comes the unfortunate cost of buying the puts as a form of insurance. This does impact your overall portfolio return. However, you do have a greater peace of mind in knowing that your investments are hedged against any major disaster.
2. Buy High Sell Higher
During bull markets (those markets that are trending upward), the opportunity for generating good returns on your investments increases by buying market leaders.
The buy high sell higher investor is one who focuses on buying those top-notch best-of-breed businesses that are current market leaders. The notion is that by buying those stocks that are in favor with Mr. Market, market momentum due to investor confidence will carry the stock price to higher levels.
Being a momentum investor requires a good understanding of global and seasonal market trends, assessing a business?s key fundamentals for growth and setting both time expectations and limits for one?s investments. The momentum investor is always assessing the impact of dead money, investments that are going nowhere, on the bottom line. In other words, they attempt to maximize winners and minimize losers in their portfolio.
3. Buy for Cash Flow
My favorite approach to investing is to invest for cash flow from multiple sources. Cash flow investing generates cash through a combination of stock purchases and options positions.
Typically high-quality dividend-paying stocks make up the core holdings. The dividends paid out can either be used immediately as a source of income or re-invested and allowed to compound over time.
Coupled with this strategy is the sale of covered calls, where possible, on the dividend-paying stock or another fundamentally sound stock. By ?renting? out your stock in return for a premium paid to you, you create another income source from your stocks. This cash flow source can either be used immediately or reinvested.
What I love about this approach is that by layering in cash flowing strategies you are able to accelerate your wealth creation, especially when you allow your cash to compound over time.
This is a great thematic approach that works well in today?s market environment, once you have picked up a couple of conservative options strategies.
There you have it three thematic approaches that offer today?s investor better opportunities for growing and preserving one?s capital than a traditional buy, hold and pray approach.
Read more posts like this in our Investment Strategies Category.
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