History does not always repeat, and there is a sizable hole that consumers and investors have to climb out from. However, there are reasons to think that the steps taken by the Federal Reserve and U.S. Treasury to alleviate the financial crisis and to get credit flowing again will ultimately bear fruit.

For example, the recent announcement of the Term Asset-Backed Securities Loan Facility (TALF), under which the Fed will spend $600 billion to buy mortgage-backed securities, has already led to a big decline in 30-year mortgage rates, making home buying more affordable.

Certainly, concerns remain about additional shoes that may drop in the credit mess–including credit cards and commercial real estate. There is also the concern voiced by some that Wall Street estimates for corporate profit growth in 2009 remain too high.

Still, there is reason to be optimistic for the long term. The yield on the 10-year Treasury has hit an all-time low and assets in money market funds are near record highs.

While valuations of many stocks are suggesting that corporate profit growth will not return anytime soon, gas prices are much lower in most places and many are expressing optimism about the economic team that President Obama has assembled. The result is a growing number of people now believe it may be a much better time to be buying than selling, even though it wouldn't be a big surprise if the lows of November are revisited.

As the American humorist Arnold H. Glasow said, "The key to everything is patience."

Experts say there are a number of reasons to think that the steps taken by the Federal Reserve and U.S. Treasury to get credit flowing again will ultimately bear fruit–in time. That's why patience is essential.

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Patience Is Key to Successful Investing

Many people will tell you that Mutual Fund Investing isn't actually a strategy, but I disagree. When you invest in mutual funds, you and many other investors are pooling money together and trusting a professional fund manager to achieve your investment goals. That makes this a unique approach. There is no other strategy that is based on the investing talent of someone other than the investor. The investor's strategy in this case is to get very good at finding great funds run by talented fund managers whose investing goals are in line with their own.

While Mutual Fund Investors don't have to learn how to implement a traditional investing strategy, there is still a lot involved in identifying top funds and fund managers that are strong enough to beat the market. Mutual Fund Investors must learn enough fundamental analysis and technical analysis to be able to minimize fees and expenses, minimize tax liability and compare a fund's performance to its peer group and to a relevant index. Don't worry if you're hoping to avoid fundamental and technical analysis, the small amount that you'll need to learn for this strategy is easy to master and will be as simple as running your fund through a short mutual fund checklist. The rest of the strategy is criteria based. Mutual Fund Investors develop and constantly refine a set of criteria designed to determine the quality of a fund and estimate its future performance.

Creating your selection criteria sounds like it could be complex but Mutual Fund Investors have an advantage. They have easy access to vast amounts of information because every Mutual Fund is required to provide a prospectus. This document contains a wealth of information and all funds are required to provide the same information presented in a similar format. Once a Mutual Fund Investor gets good at reading a prospectus they can really pick apart a fund's quality, strategy, and potential quickly. Successful Mutual Fund Investors combine prospectus information with the mutual fund data mining and screening tools available at investing research sites such as Morningstar.com to come up with a detailed analysis of each fund before they buy.

Investment Selection Methods

Mutual Fund Investors usually start their research by using the mutual fund screening tools at any of the major investment research sites to identify funds that meet their minimum requirements. If a fund doesn't pass every item on this initial checklist, they won't even bother running it through their quality and performance criteria. Some of the more common metrics on a Mutual Fund Checklist are fund strategy, expense ratio, loads, redemption fees, 12b-1 Fees, capital gains distributions and transaction fees. The checklist is designed to validate that the fund's investment goals, expenses, and tax efficiency are in line with the Investor's. Click the following link if you would like to see a sample Mutual Fund Checklist.

Next, Mutual Fund Investors want to see how the fund is performing. They compare the fund's performance to its industry group and to a relevant benchmark (usually an index). They are typically looking for funds that have outperformed both for long periods of time because this gives them some insight into the talent of the fund manager.

After finding funds that pass their mutual fund checklist and that are outperforming their peers and a relevant index, Mutual Fund Investors know that they have compiled a list of funds worth putting through their fund quality and performance criteria. This final set of selection criteria pulls information from the prospectus and from research web sites to determine if the fund is the best available in its category, measures how it will impact the portfolio mix, and predicts future performance. If the fund still looks promising after all of these tests, Mutual Fund Investors know that they have a winner that they can buy with confidence.

Risks

Capital Gains Distributions are one of the most confusing stumbling blocks for Mutual Fund Investors. Funds are required to distribute at least 90% of their profits (Capital Gains and Dividends) each year. They pass this to investors and then drop the NAV (fund price) to reflect the distribution. You don't lose any money on the transaction but it does create additional tax liability. Mutual Fund Investors try to limit capital gain distribution expenses by avoiding buying a fund right before its distribution date and by holding funds for a long period of time so that they also receive the return and profit rather than just the additional tax liability.

Even though there are a lot of disclosure laws in place to protect you, you will still receive phone calls, emails, and other solicitations containing misleading mutual fund advertisement that can lead beginners astray. Successful Mutual Fund Investors always put every fund through their mutual fund checklist and review the fund's historical performance. If something seems too good to be true, it probably is.

There are numerous fees associated with Mutual Funds. Here's a simple fact that will help you remember which fees to pay and which to try to avoid. Every fee is optional! That's right, the funds decide what fees they're going to try to get away with charging, so can you guess which ones you should pay? None.

Many new Mutual Fund Investors ask, "if I avoid funds with fees am I passing up the best mutual funds?" Definitely not, the majority of funds, especially high quality ones that you would actually want to buy, have learned that charging these fees hurts their business and puts them at a competitive disadvantage. However, now and then you will still run into a fund that tries to sneak them in, most of these loaded funds and fee-laden funds are sold through financial planners. They will not warn you up front about loads, 12b-1 fees, redemption fees and other transaction charges because that's how they make a living. Smart Mutual Fund Investors always verify that there are no fees before they buy.

Minimum investments are more of an annoyance to Mutual Fund Investors that don't yet have a lot of capital. It's very frustrating to do all your homework and decide that you want to buy a fund only to find out that you don't have the $5,000 minimum investment. Take heart, if you invest wisely your money will grow quickly and soon you won't even bat an eye at minimum amounts.

Benefits

Mutual Funds have two advantages over stocks when it comes to size. A stock that performs well for several years in a row will inevitably get to a point where it is nearly impossible to top last year's performance or meet analyst projections. Conversely, the longer a fund manager runs a fund, the more savvy and experienced he becomes so in most cases performance constantly improves. In addition, as a fund grows your returns actually improve because the management fees become a smaller percentage of total assets (economies of scale). Admittedly, it can be tough to manage the mega funds that get up into the billions but every fund manager has the option to close the fund to new investment if they feel that performance is deteriorating.

Mutual Funds are becoming the investment of choice for online investors because you can trade them for free through the major online brokerages, there are no fees or loads. Transaction fees add up quickly for most strategies, free trading is a significant perk for Mutual Fund Investors, especially those investors that trade a lot. Mutual Fund Investors also try to avoid funds with high expense ratios or they will have squandered this advantage. A good rule of thumb is to avoid fees with expense ratios > 1.5% unless you expect extraordinary returns.

Diversification is one of the greatest strengths of mutual funds. Each fund represents an entire portfolio, not just one stock. Because a fund owns an entire portfolio of stocks, you have a lot of protection from losses. In addition, a fund's portfolio is managed by a professional fund manager whose career and income is directly tied to how well he chooses investments for you, the person paying his salary (no investors = no fund).

The amount of information that funds are required to disclose makes their strategy and performance almost transparent. We wish this were true for individual companies, but the recent 2007-2008 subprime mortgage crisis proves this isn't the case since financial institutions keep surprising the market with multibillion dollar loss announcements. It's very difficult for a mutual fund to fool wary investors, problems are pretty obvious to anyone that knows what to look for. To protect themselves, Mutual Fund Investors periodically run each fund back through their checklists to make sure that expenses, strategy, and performance are still in line with expectations.

Long-Term Outlook

Mutual Fund Investing is a very popular strategy that is already huge and will continue to grow. It is the only strategy that will allow you to test drive any of the other strategies without actually having to master them yourself. Today, there are over 10,000 funds to choose from and they cover every industry and investing strategy imaginable.

This is one of the few strategies that will serve you well for a lifetime. Not only is it a low maintenance strategy since fund managers are the ones actually managing your money but it also offers Mutual Fund Investors enormous flexibility. For example, as you approach retirement, you can shift to a more conservative strategy. For example, you can shift from growth stocks into income producing Blue Chips and Bonds by simply buying funds aligned with your new investing goals.

This strategy is a proven long-term market beater, but you will have to master selecting top notch fund managers since only about 20% of all funds beat the market. Should that discourage you? No, certainly not, it should only make you realize that you can't trust just any "professional" with your money, you have to learn how to identify the most talented. Many of the best Mutual Fund Investors, such as Thurman Smith, have beaten the market significantly for over 20 years and counting. Successful Mutual Fund investors never stop refining their Mutual Fund selection criteria.

Investor Profile

There are several types of investors that naturally gravitate towards Mutual Fund Investing. This is a great strategy for anyone that likes to change strategies frequently or wants to test a new strategy out before they spend an enormous amount of time and energy trying to master it. Another investor type that is a good fit is anyone that doesn't want to spend a lot of time managing their portfolio. These investors would rather spend a little time identifying strong funds with talented fund managers and then let a professional manage their money. This is also a popular strategy for anyone trying to minimize transaction costs, most mutual funds trade free of charge through online investing brokerages.

This strategy isn't a good fit for everyone, some investing goals and investing styles clash badly. For example, Aggressive Growth Investors that are looking to hit Google-like home runs are not a good fit. Why? Mutual funds own an entire portfolio, not just one stock. This diversification decreases the risk of losses but it also means that if a fund owns a company like Google its returns will be averaged with the rest of the portfolio.

For those that are not net-savvy and have no desire to learn how to use online investing research tools, this is going to be a tough strategy. The information provided by sites like Morningstar.com is critical to a Mutual Fund Investor, it saves them an enormous amount of time, work and money. A prospectus contains a lot of information but can't, by itself, tell you enough about a fund to make a purchase decision even if you read it cover to cover.

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Mutual Fund Investing Strategy

Technical analysis is the complete opposite of fundamental analysis so it's no wonder that Day Trading is one of my least favorites strategy. This is a high-risk strategy, even for those that master it. The vast majority of new day traders don't last a year, they lose enough money to be scared into a different strategy, sometimes entirely out of investing. Day Trading requires an enormous tolerance for risk and uncanny intuition that only comes from years of study and experience.

Technical analysts select investments by analyzing chart patterns, historical price action, statistics and options "greeks". They believe that their time is best spent trying to anticipate price movements in stocks, indexes, options and other securities. The goal of technical analysis is to recognize historical trends in chart and price patterns and profit by anticipating how the next piece of the pattern will play out.

Day Trading is almost exclusively a short-term trading strategy, very few positions will ever be held beyond the close of the current trading session. This is the major reason day traders depend on technical and statistical analysis, because other forms of analysis such as fundamental analysis are long-term oriented. Many technical analysts feel that other forms of analysis are not useful because factors such as political events, market psychology, economic factors, and fundamental factors are almost instantly reflected in a security's price.

The most common type of investment for a Day Trader is options. Options are a form of derivative, and this means that the value of an option is based on an underlying security such as a stock. More specifically, an option's value is based on the behavior of an underlying security.

While this strategy isn't the most research intensive, it is definitely the most time consuming. The term "Day Trading" can be taken literally. You will be required to check the market frequently since you can lose a great deal of money very quickly if a trend reverses against you. Most professional day traders check the market, their open positions, and any chart patterns that they're tracking many times per day.

So what is our biggest complaint about options trading? We don't really have anything against the strategy. In fact, there are a couple trades, such as covered calls and selling out of the money premium spreads, that we feel offer acceptable risk vs return and can act as great hedges against risk. Our problem is that there are so many "we'll make you rich" options experts out there. Too many new options traders get suckered into these expensive programs and lose a lot of money. Not only are they getting terrible investing advice, they are trading securities that they don't understand. Successful options investors will tell you that it takes years of experience to get a feel for options trading, but there are a lot of scammers out there selling "secrets" or trading tools that will supposedly enable novices trading like pros immediately.

Investment Selection Methods

Day Traders use technical analysis to identify investments and evaluate their open option trades. Technical analysis is a combination of charting, statistics and Greeks used to predict price movements.

Day Traders use charts to try to identify and predict price patterns. There are far too many chart patterns to discuss or even list, but below is an example of one of the most popular, the cup with handle.

Cup with Handle Example
This cup with handle example is a bullish pattern designed to help technical analysts identify stocks that have experienced a consolidation period that is predictive of a price breakout.

There is also a lot of terminology specifically associated with options. A few examples you may have heard are are In the Money, Out of the Money, and Expiration. In the Money means the price of the underlying asset (usually a stock) and the strike price of the option are such that the contract could be exerised for a profit. Out of the money means the option is currently worthless because the strike price is outside the price of the underlying. Expiration refers to the fact that options expire after the date specified in the options contract.

Statistics are particularly important to day traders when we talk about risk. Technical analysts use statistics to help guage volatility and measure the odds that events will or will not occur. Two common statistical measures that technical analyst find useful are standard deviation and beta.

• Standard deviation: Standard Deviation measures how much an investment deviates from its average. For example, if $5 is one standard deviation for a stock that averages $40 and it is currently trading at $55 this tells a Momentum Investor two important things. One, the stock is very volatile and two, it has a lot of positive momentum since it is currently trading three standard deviations above its average.
• Beta: Beta is useful because it measures an investment's volatility against a benchmark. For example, if you are comparing Bonds to Small Caps and the Bond beta is 0.8 this tells us that Bonds will grow less than Small Caps, 20% less to be exact. If the Small Cap index goes up by 20%, this means the Bond index with a beta of 0.8 will only increase by 16%.

To anyone that has never traded options, the geeks can be intimidating because words such as Delta, Gamma, Vega and Theta bring back painful memories of undergrad calculus. However, for an options trader, greeks are simply several statistical measures that are used to measure the sensitivity of an option's price vs changes in the underlying asset, volatility, and time to expiration.

Risks

The major reason day trading is considered the most aggressive strategy is that, due to the nature of options, you can lose so much money so quickly. This is true regardless of whether you are buying or selling options. For example, if you sell a naked SPX index put for $500 in premium, but the trend reverses against you sharply, you could lose tens of thousands of dollars on this one trade. With naked puts, the loss potential is unlimited. When you're buying options rather than selling them, your losses are limited to the amount that you spend on the contract, but the odds are usually much higher that you will lose money.

No one has ever proven that they can consistently predict the market or individual securities. Even the best options traders will tell you that they are happy if they are betting right 60-65% of the time. When you are only getting it right a little over half the time, you will have to have a great risk management plan in place to limit losses. You'll also have to have an incredible feel for the market and for the stocks and indexes you trade to profit much more on your good trades than you lose on your bad trades. This brings investor psychology into the mix, and that usually spells disaster for beginners. Greed and fear are tough for beginning investors to deal with, they will often take a profit too early or hold onto a losing option too long because they are hoping it will go back up.

Benefits

Some traders do master this strategy, but very few successful day traders are your average individual investor. Most are professional traders that spend every trading hour studying the stocks and indexes that they trade and managing their open positions. Many people that trade options successfully are professional hedge fudn managers and mutual fund managers that use certain types of option trades to hedge their portfolio's risk rather attempting to make a profit.

One redeeming quality of technical analysis is that people are finding many mainstream applications. Technical analysis, particularly the charting and statistic components, can be great for determining entry and exit points and identifying unusual movement in your securities or the market.

Long-Term Outlook

This strategy will always be around because there are so many investors looking for easy money. That's probably why there are so many scammers selling option trading "secrets" that promise to help beginners instantly trade like professionals. Too many new investors today seem to be looking for quick wealth. Unfortunately, it's going to take years of hard work to master your strategy, regardless of which one you choose. The good news is that everyone can build wealth as long as they have the desire and discipline and work hard to master a proven investing strategy and good savings and spending habits.

Investor Profile

This is a high-risk strategy, many new investors choose this strategy because of the promise of huge returns but those promises are seldom fulfilled. The odds are not in your favor, even the best day traders are only getting it right about 60%-65% of the time. Even if you can match this %, the odds still aren't in your favor because you have to make a lot more on your good trades than you lose on your bad trades, a daunting challenge when you factor in investor psychology. This is a strategy for those with nerves of steel, an uncanny intuition for market and stock trends, and 40+ hours a week to study strategy and watch trades.

If you are determined to master this strategy, I recommend that you start simple and relatively safe with high-probability spreads and covered calls. Even then it will still require a high risk tolerance and willingness to take big losses now and then, but this approach gives a much better chance of surviving the first year and making some profitable trades.

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Day Trading and Technical Analysis

Momentum Investors try to keep all of their money invested in the current top performers all of the time. Great investments to a Momentum Investor are those that have outperformed the market and their peers during the last 12 months, with more emphasis on the most recent months. They don't worry about asset allocation or diversification because their strategy doesn't allow them to, the goal is to always be in the most popular and fastest growing investments.

Rather than using diversification and allocation to balance risk vs. return, they try to manage risk by moving quickly out of industries and assets that start showing signs of deteriorating performance. Momentum investors believe that the market is too complex to predict which industries or assets will perform well long-term. If they are right and what will become popular next is completely random, investors are better off developing a system that will identify the market leaders.

This is a research intensive and time sensitive strategy. Not only do Momentum Investors need a system that can reliably identify today's best investments, they must also have a system that warns them to get out of investments quickly when performance begins to deteriorate. Most of the research will be statistical analysis and technical analysis since these are the two types of analysis best suited to measuring short-term trends and short-term performance.

However, Momentum Investing is also one of the most flexible and dynamic investing strategies for those that master it. Momentum Investors will buy stocks, REITs, precious metals, currency, bonds, mutual funds, and anything else that is currently hot. Asset type doesn't matter, only performance. They will also temporarily invest as if they were following a different strategy when necessary. For example, if bonds are currently outperforming stocks, momentum investors will hop right on the Income Investor bandwagon, at least until momentum shifts elsewhere.

Investment Selection Methods

Momentum Investors use a combination of statistical and technical analysis to identify entry and exit points and which investments currently offer the best opportunity for rapid growth. Surprisingly, they don't try to predict when market cycles start or end. Momentum Investors are more concerned with identifying which industry or asset type is entering a mark-up phase (growth component of the market cycle) and getting their money in as quickly as possible.

The Standard Deviation, Beta, Alpha, and Sharpe Ratio are several of the common statistical measures that Momentum Investors use to analyze investments and the market. Statistical indicators can tell them a lot about recent performance and give them a way to benchmark investments against each other regardless of industry or asset type. Based on the long list of assets we mentioned in the Major Goals section, it's obviously important for Momentum Investors to be able to analyze assets that wouldn't ordinarily be compared against each other.

We won't spend a lot of time on statistics since your eyes just glazed over but we wanted to at least provide a basic intro to the most common metrics:

• Standard deviation: Standard Deviation measures how much an investment deviates from its average. For example, if $5 is one standard deviation for a stock that averages $40 and it is currently trading at $55 this tells a Momentum Investor two important things. One, the stock is very volatile and two, it has a lot of positive momentum since it is currently trading three standard deviations above its average.
• Beta: Beta is useful because it measures an investment's volatility against a benchmark. For example, if you are comparing Bonds to Small Caps and the Bond beta is 0.8 this tells us that Bonds will grow less than Small Caps, 20% less to be exact. If the Small Cap index goes up by 20%, this means the Bond index with a beta of 0.8 will only increase by 16%.
• Alpha: Alpha compares an investment's expected performance, based on its beta, to its actual performance. If an investment has a negative alpha that means it underperformed expectations. Momentum Investors interpret this to mean that either the investment is poorly managed or that momentum is shifting somewhere else.
• Sharpe Ratio: The Sharpe Ratio uses standard deviation to compare an investment's risk and returns. The higher the Sharpe Ratio the better an investment's returns have been relative to the risk it has taken on. The Sharpe Ratio is valuable because it is a relative measure, it allows Momentum Investors to accurately compare the risk and performance of completely different types of assets to each other.

Momentum Investors also incorporate technical analysis and charting. They focus on support and resistance levels and moving averages to try to identify investments that are entering a strong growth cycle, warn when a cycle appears to be ending, and to set buy limits and sell limits. Setting entry and exit points is important for Momentum Investors because the hottest stocks tend to fall much faster than the market when conditions turn bearish.

Since charting is not an exact science, most Momentum Investors also use simple weighted averages to measure the relative price strength of an investment. Weighted averages allow Momentum Investors to compare how well or poorly their investments are doing versus any other investment or market index. When the relative price strength weakens, Momentum Investors know that either momentum has shifted somewhere else or they are entering a bearish period.

Risks

This is not a strategy for timid or conservative investors, your portfolio will always be very volatile and will require constant attention. The analysis required for this strategy is relatively easy to master, but the need to monitor your portfolio and the market daily can wear on even the most diligent investors.

Perhaps the greatest risk of this portfolio is it lends itself to buying high and selling low. Momentum Investors are always trying to find the hottest investments, but if they aren't very good at statistical and technical analysis they'll frequently get in late (buying high). Or, they may have the reverse problem, they may not realize that momentum has shifted somewhere else and wind up holding too long (selling low).

Momentum Investors are willing to bounce between multiple assets such as REITs (Real Estate Investment Trusts), Bonds, Currencies, precious metals, funds, and Stocks to name a few. As a result, they can wind up in assets that they know very little about. When you are a novice trying to trade something as complex as currency, you can lose a lot of money fast.

While Momentum Investors argue that this isn't a danger, it's important to keep in mind that you will never have a balanced portfolio. The purpose of diversification and asset allocation is to optimize risk Vs return by having several asset types across many industries and geographies. Momentum Investing requires that you keep your money only in assets that are performing well right now so you have nothing to balance out losses. This makes risk management extremely important, Momentum Investors have to be good at getting out of bad investments quickly.

Benefits

Momentum Investors argue that their strategy is more effective than the traditional asset allocation and diversification approach because all of their money is optimized during bullish periods, none of their money is in lagging assets. For example, an Index Investor would always want some money allocated to Large Caps while a Momentum Investors would point out that sometimes even the best Large Caps underperform mediocre Small Caps and Growth Stocks.

Momentum Investing takes advantage of seasonality and constantly changing business cycles rather than suffering from them. For example, if a certain category of commodities shows strong price appreciation consistently every summer, a Momentum Investor's selection criteria would only suggest these commodities when they're doing well, never when they're lagging the market. The same holds true for business cycles, only investments that are in a growth phase will pop up on their radar.

Unlike many strategies that adhere to a specific mix, Momentum Investors can transition smoothly between investments held by any strategy. For example, it doesn't matter to a Momentum Investor if the market momentum shifts from value stocks to growth stocks, they can transition smoothly from one into the other because they are only concerned with performance.

Let's be honest, everyone wishes they had bought companies like Google, Microsoft, or Starbucks. Momentum Investors are constantly seeking the fastest growing and most popular investments. Like Growth Investing, Momentum Investing is one of the few strategies that give you the chance to hit a home run now and then.

Long-Term Outlook

Momentum Investing is not currently a popular stock market investing strategy but it certainly was attracting a lot of attention during the tech boom of the late 90's. This strategy attracts a lot of investors during bull markets because the returns are phenomenal. However, most of the converts switch back to their old strategy after the next bear market. Wanna-be Momentum Investors that don't have proper risk management strategies in place get crushed in Bear markets. Why? Because they only bothered to learn half the strategy, the buying hot investments part, they didn't bother with risk management. If you're going to try Momentum Investing, for your own sake, master the entire strategy!

Investor Profile

Investors that are looking for big winners, like to trade a lot, and prefer aggressive strategies will be drawn to Momentum Investing. This is an attractive strategy for those that feel buy-and-hold strategies are tedious, boring, and less likely to provide stellar returns. Momentum Investors also have to buy into the theory that owning the today's strongest investments outweighs the benefits of asset allocation and diversification. This is a tough sell, we believe individual investors should always hold a balanced portfolio but some Momentum Investors have proven that their strategy can be incredibly successful.

Momentum Investors need a high risk tolerance, they are guaranteed to take losses during bear markets. Risk management helps, but it's the toughest part of the strategy to master. Momentum Investors have to react very quickly when the market turns against them.

This is not a good strategy for the Casual Investor, Momentum Investing takes a lot of time, you have to monitor your portfolio and the market daily. This is also a poor choice if you lack confidence in your investing abilities or prefer to have a lot of time to analyze information before making a decision. Momentum Investors will have to make fast risk management decisions based on limited information when momentum shifts or the market turns bearish, so they need a lot of self-confidence.

This strategy is a market beater if you master it, but not many people do. Two names you may recognize are George Soros and Janet Brown. Soros is famous for breaking the Bank of England and generally disrupting currencies around the world, not to mention providing investors a 3,365% return over a 10 year period in his Quantum Fund. Janet Brown is another remarkable example, she is the only Momentum Investor I know of that has beaten the market soundly for 20 years and counting. These are two of the most disciplined investors you will ever meet and they have to be, Momentum Investing is a demanding strategy.

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Momentum Investing Strategy

Growth Investors are constantly trying to find tomorrow's strongest stocks. They look for companies in the early stages of their growth cycle that are already showing signs of dominance. When they find a promising stock, they buy it even if it has already experienced rapid price appreciation in the hopes of riding the wave as the company grows and attracts more and more investors. There isn't a lot of analysis involved in growth investing, it is a criteria based strategy. When I say criteria based, I mean Growth Investors are much more concerned about whether a company is exhibiting behavior that suggests it will be one of tomorrow's leaders than they are about the fundamental or technical aspects of a stock.

The criteria used to select growth stocks varies widely, but in general, Growth Investors are looking for companies with the potential to dominate their category and grow earnings and revenue exponentially for the next several years. Most growth stocks offer something that gives them a unique advantage such as a cutting-edge new technology (early Microsoft Bill almost took over the world), visionary leader (Steve Jobs at Apple Inventions that start with an "I"), a competitive advantage (e-Bay will they ever have competition?), or a new and unique marketing approach (Starbucks are you selling coffee or a lifestyle?).

Investment Selection Methods

There is a little fundamental analysis and occasionally some technical analysis involved in evaluating potential growth stocks, but for the most part, Growth Investors are trying to evaluate a stock's competitive position in the market. They won't be scared away by poor fundamentals as long as their growth stock criteria are met. For example, if you have a startup with patents on a new technology, they are the first mover in a hot new industry, and they have a CEO with several successful startups under his belt, many Growth Investors will buy it even if it is in debt and losing money.

One of the fundamental metrics you will hear Growth Investors talk about a lot is the Price-to-Earnings Ratio or P/E Ratio. This simple calculation is the Earnings per Share divided by the Price of the stock and the reason they love this measure is it tells you today how investors think the stock will perform tomorrow. While some strategies would interpret a high P/E Ratio to mean a company is currently overvalued, a Growth Investor interprets this to mean that the company will earn much more in the future and that investors are simply pricing in those future earnings.

There isn't a set of rules to follow for identifying growth stocks but there are a few growth investing guiding principles that most Growth Investors adhere to. We mentioned that a growth company needs to be a leader in a new industry, so this tells you that a growth company needs to have a sustainable competitive advantage. This can come in the form of patents, new technology, deep pockets, or first mover advantage. You also know that the P/E ratio is important and this tells you that rapidly increasing earnings is a critical piece of the strategy. Something that goes hand-in-hand with rapid revenue growth is expense management. Revenue is great but if expenses are growing faster, profit margins begin to deteriorate, a common pitfall for many would-be growth stocks. Finally, if a stock is going to survive the competitive early stages of a business cycle and emerge as the clear winner, it has to have great management. Growth Investors always evaluate who is at the helm. They want to see leaders with successful track records, visionaries who are the best in their field or new and innovative business models.

Are you starting to see why we chose to review this strategy right after Value Investing? They are basically opposing strategies, what a Value Investor would consider a great stock a Growth Investor would consider trash and vice versa. Does this mean that one strategy is right and one is wrong? No, they have both proven to be market beaters over long periods of time for investors that get good at implementing their strategy. However, this certainly strengthens our recommendation of not mixing strategies, can you imagine a Growth/Value investor? Yikes.

Risks

Growth investors will experience a lot more volatility than other strategies and the market. What does that mean? That means their stocks drop first and they drop the fastest during bearish periods. This is due to the nature of growth stocks, many are young companies with high P/E Ratios and are viewed as overvalued during market corrections and recessions. Growth Investors have to be willing to ride out losses until the market turns bullish again.

While Growth Investing is not as technically or analytically demanding as a strategy like Value Investing, it is still a very research intensive strategy. Growth Investors have to keep up with more than just the market, they have to know which industries, geographic regions, and stocks are hot and they also need be aware of new technologies, services and products quickly. Successful Growth Investors are constantly shifting to different types of stocks to make sure they stay invested where there is currently a lot of interest and innovation. There is an enormous amount of information available if you're trying to figure out what's "hot" in the market right now. Every web site, newspaper and magazine has a different opinion. Growth Investors have to be able to weed through all of this information and find the stocks that will be tomorrow's leaders.

Risk management is a tricky but critical component of Growth Investing. Many Growth Investors use buy limits and sell limits to stay disciplined and help deal with this constant balancing act. Properly set buy limits keep them from putting money into stocks that have already experienced most of their rally and also tell them when to take a profit. Properly set sell limits will tell them when to pull their cash out of stocks that have lost as much as they are willing to risk on that particular investment. Granted, this approach reduces your risk exposure to bad stocks, but it is disastrous if you set bad limits because growth investors lose big when their money is in cash during a rally. Growth Stocks will significantly outperform the market during bullish periods but not if your money is sitting on the sidelines.

This is not a buy-and-hold strategy, you will trade a LOT so transaction costs can add up very quickly. A good risk management program may even require that you buy and sell the same stock several times if it fluctuates through your buy or sell limits.

Benefits

Growth stocks grow much faster than other stocks, you will significantly outperform the market during bull markets. This is the goal, Growth Investors know that if they are invested in good growth stocks during rallies their huge gains will more than make up for the losses they experience during bear markets.

Growth Investors that get very good at risk management are more likely to sell out near the top of a stock's growth cycle, avoid buying when it's too late to get in, and sell a stock when it no longer appears to be behaving like a growth stock. Great risk managers will have some protection against losses plus they will always have most of their money invested during market rallies.

Let's be honest, everyone wishes they had bought companies like Google, Microsoft, or Starbucks. Growth Investing is the strategy that gives you the best odds of hitting a home run. This is one of the few strategies that actively seeks the next powerhouse stock, the one that can grow from a startup to a Blue Chip. This factor draws more people to Growth Investing than any other, many investors want to try to buy companies that make them feel like they won the lottery.

Long-Term Outlook

Growth investing isn't going anywhere, it's a very popular strategy that always draws an enormous number of investors looking for big gains during bull markets. Great Growth Investors will always outperform investors implementing other strategies. Most strategies are more conservative and provide much more protection against losses during bear markets but can't keep up with this strategy's explosive growth during bull markets because they aren't willing to take the risks involved.

One drawback of Growth Investing is that you will likely need to change strategies when you get close to retirement. As your portfolio gets much larger and as you get closer to the end of your career, capital preservation will become much more important than capital growth. Why? For example, imagine that you're only three years from retirement and a recession hits. Since you're a growth investor, your portfolio drops more rapidly than the market and you wind up losing 40% of your portfolio. If you're 15 years from retirement, no problem, you have plenty of recovery time, but since you're only three years away you are not likely to make up your losses and very unlikely to gain any more ground before your retirement date. You must then decide if you would rather work longer or manage to a tighter budget during retirement. Lose-Lose decisions are no fun, smarter investors switch to a more balanced investing strategy as they near retirement.

Investor Profile

If you choose this strategy, do several hours of research per week for the first year or two so that you can more quickly develop a knack for identifying high potential growth stocks early in their growth cycle. Study history, it can tell you a lot about how great companies behaved and were viewed by the market early on. We can't stress research and work-ethic enough. There is so much hype in the media about what stocks and industries are "hot", and successful Growth Investors are able to ignore all the hype and find stellar companies hidden amongst the rubbish. You will have to put in a lot of hard work to refine your selection criteria and develop this talent.

You will need an iron will and a strong stomach to be a Growth Investor because you are guaranteed to take losses, often very quickly, during bear markets. Successful growth investors accept this volatility as a necessary evil and ride it out while they wait for the next rally to erase their losses. Risk management helps, but keep in mind that risk management for a Growth Investor is geared more towards timing the buying and selling of your growth stocks to maximize returns than it is toward protecting you when the market is going down. You will usually be fully invested in high-risk stocks when a bear market hits, you'll have to accept that there will be some rough patches. These fast and sometimes large losses make it very hard for all but the strongest Growth Investors to avoid making stupid investing mistakes like panicking and selling low.

A Growth Investor's goal is to identify tomorrow's greatest companies and sometimes this can feel like trying to find a needle in a haystack, you will inevitably pick losers, especially as a beginner. The only way to combat this is to continue refining your criteria and risk management techniques so that you pick fewer and fewer losers and get out of them more quickly as you gain experience.

You can expect spectacular gains from this stock market investing strategy than from any other if you master it. Investors such as the late Al Frank crushed the market averages for over 25 years. Granted, in some years he lost as much as 40% of his portfolio but when the market turned he made it back quickly. Investors like Al do their homework. He was one of the most disciplined and hard working investors to ever practice Growth Investing. He did exhaustive research and never stopped refining his risk management and stock selection techniques throughout his long and successful investing career.

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Growth Investing Strategy

Income Investors search for investments that are safe and stable and that will provide a steady stream of current income. This doesn't mean that if their portfolio grows 10% this year that they will take that money out of their account and use it as income. In fact, Income Investors try very hard to avoid touching their principal. Capital preservation is key to this strategy because they are using their investments to generate income. The two most common forms of income that these investors seek are Dividends from Stocks and Coupon Payments from Bonds.

This is a research-intensive strategy because it requires a lot of Stock AND Bond related fundamental analysis. Since Stocks and Bonds are so different, you will need to learn two different variations of fundamental analysis. Why are Stocks and Bonds so different? When you buy a stock you are buying a small piece of that company's assets and earnings, you purchase "equity". When you buy a bond, you are lending a company or government money to cover debt or for expansion projects, you purchase "debt". Income Investors need to understand enough about the structure and risks of both asset types to make investment decisions with confidence.

Like Value Investing, Income Investing is a buy-and-hold strategy, they don't concern themselves with short-term market trends. However, that's where the similarity ends, Income Investors aren't looking for undervalued companies, they are looking for safe incoming producing assets, there is much less emphasis on capital growth.

Investment Selection Methods

To help you better understand the differences between Stocks and Bonds we'll break this section into two parts, Stock Selection Methods and Bond Selection Methods.

Stock Selection Methods

Since most stocks don't pay dividends and those that do can change their policy tomorrow, choosing stocks is the more time consuming piece of analysis for Income Investors. Their research is designed to identify well-established Large Caps, often Blue Chips, that have a long track record of slow and steady price appreciation, stable long-term sources of revenue and generous dividend payouts.

Because Income Investors already have a clearly defined population of stocks to choose from, large caps with generous dividends, their initial screening analysis simply eliminates stocks that don't align with their strategy. They try to eliminate companies that exhibit excessive volatility, are part of turbulent industries, have new unproven products, experience excessive revenue and expense fluctuations, or are in declining periods of their growth cycle.

Stocks that pass these minimum requirements can then be scrutinized more closely and ranked. The final Income Investing analysis is designed to identify which of these remaining companies are best suited to protect capital, provide modest growth and generous dividends for long periods of time.

Some of the common stock-related terms you will hear frequently from Income Investors are Dividend Yield, dividend reinvestment, and capital preservation. The Dividend Yield measures a stock's return as a percentage of the share price, and the higher the better. Income Investors typically look for yields greater than 5%, but it's important that their selection criteria takes into account the increased risk that goes hand-in-hand with a higher yield. Dividend reinvestment simply means using the share of earnings that the company passed to you in the dividend to buy more of their stock. If an Income Investor doesn't need the dividend income, this is a great way to boost returns. Capital preservation doesn't really need a definition, Warren Buffet summed it up best with his mantra "don't lose money", which cuts right to the heart of this strategy. If an investor uses these terms frequently in a conversation, you are very likely talking to an income investor.

Bond Selection Methods

Since many of our readers aren't familiar with bonds we wanted to provide a one-paragraph introduction before we talk about selection methods. A Bond is simply an innovative way for a company or even for governments to borrow money at reasonable interest rates. The reason a Bond system is needed is because there isn't a bank in the world that could or would lend the vast sums needed by the US Government to cover US debt or needed by some of the world's largest companies to fund expansion. When you buy a bond, you are one of many creditors who have provided a loan. In return, the issuer will distribute fixed interest income payments twice per year called Bond Coupon Payments. These payments won't change regardless of the Bond's price fluctuation. When the bond reaches maturity (ends), you will receive your price adjusted principle back.

All Income Investors consider a Bond's credit rating before they buy. These credit ratings are very important because there is always the chance that a government or company will fail to pay back the loan. The credit rating estimates the chance that a bond will default on its debt. There are three major Bond rating agencies, Moody's, Standard & Poor's, and Fitch's Rating Services. They break their ratings into A, B & C, "A" being the safest Investment Grade Bonds, and all "B" & "C" considered Junk Bonds. Better credit ratings mean a safer Bond but also means a lower yield so Income Investors have to find a rating that makes them comfortable with both the risk and the return.

Income Investors also spend a lot of time studying interest rates because they have a major impact on a bond's price. When interest rates rise, bond prices drop and when interest rates drop, bond prices rise. How does this affect a Bond? A Change in a Bond's price changes the yield, which is a measure of a bond's profitability.

For example, if you have a $5,000 bond with a 10% yield you know that it will pay $500 worth of coupon payments. If interest rates rise and the price drops to $4,000 the yield goes up to 12.5% ($500/$4,000).
Income Investors that are about to buy a bond want interest rates to rise because this drops the price and increases the yield, which means greater profitability. However, if they already own a bond they want the opposite. Income Investors that already hold a bond want interest rates to drop because this will increase the price, and since their rate is already locked, they benefit when they sell the bond for a profit in the future. As an Income Investor, you will spend a lot of time trying to estimate the impact of changing yields and bond prices and predict future interest rate changes.

Well-balanced and fully allocated portfolios will contain some percentage of bonds, they are not unique to Income Investors, so you will hear bond terminology a lot. The only time bond talk will give you any indication that someone is an Income Investor is if they have a significant percentage of their portfolio in bonds, especially if they also hold a lot of high dividend yield stocks.

Risks

This strategy requires that you master Stock and Bond fundamental analysis and they are quite different so the initial learning curve is steep. Many people pick up some Stock fundamental analysis from implementing other strategies or from their favorite investing web sites and newspapers. Bonds, on the other hand, are not as popular an investment vehicle for the average investor so most people don't know a lot about them, especially not beginners. Give yourself ample time to study before you start buying if you choose this strategy.

You will never get the returns of the market with this strategy and that is intentional, it is not a result of a flaw in the strategy. Income Investors want to preserve their capital and generate income, they are not trying to keep up with the market because they don't want to take on the market's risk. Income Investors play a delicate balancing act. They have to accept enough risk to grow more than the current inflation rate or they aren't meeting the most fundamental objective of this strategy, capital preservation.

There is a lot of interest rate risk involved in this stock market investing strategy since they have such a major impact on bond prices and yields. If you wind up buying bonds when interest rates are dropping and selling them when rates are rising, you kill the yield. This eliminates a lot of the income that the strategy is supposed to create. Finally, while this is a very tax efficient strategy overall, a chunk of your income, the dividends, will be taxed at 15% unless your money is in a tax deferred account.

Benefits

This is a very conservative strategy, Income Investors don't have to worry about their portfolios dropping 3% in a single day which does occasionally happen to the stock market. They buy bonds and very mature stocks with a long history of steady growth and generous dividends. Even if they take short-term losses due to market volatility, they know that the type of stock in their portfolio will eventually recover.

The two different assets that make up an Income Investors portfolio, stocks and bonds, can offset each other. Remember that we said rising interest rates hurt bonds by decreasing the bond price? While rising interest rates hurt stocks as well, they usually occur when stocks are doing great. The Fed increases rates to control inflation and contain "irrational exuberance". The reverse is true as well. Bonds thrive in an environment where rates are dropping and this usually occurs when stocks are doing poorly, the fed is trying to jump-start a slowing economy with rate cuts.

Finally, bonds offer a couple of unique advantages. When you buy bonds, you are almost certain to receive your principal and at least some profit back. There are very few defaults, especially among investment grade bonds. Bonds also offer investors an opportunity to buy Tax-Free investments. Municipal Bonds, for example, will not be taxed regardless of whether or not they are traded in a tax-deferred account.

Long-Term Outlook

Income Investing is huge and growing in popularity, many baby-boomers are switching from more aggressive strategies to Income Investing in the final years of their career to protect their savings. Before you jump on the bandwagon, make sure this strategy fits your current situation.

Income Investing will never be a market beater and therefore won't be popular among investors with 10+ years to retirement. Why not? Because they tend to be more aggressive investors who don't want to sacrifice capital growth for security when they know they have plenty of time to recover from any market corrections or recessions.

Income Investors will always lag behind more aggressive strategies, but for them, this is an acceptable trade-off for the reduced risk and volatility. Keep in mind that Income Investing is not intended to beat the market, it is designed to provide current income and protect your nest egg, and in these two areas, it excels.

Investor Profile

You've probably already figured out that this is a very popular strategy among retirees. Income Investing also appeals to very conservative and bearish investors that prefer security and income over the capital growth associated with more aggressive strategies.

If you are a Value Investor switching over to Income Investing, the transition will be easy. Value Investors have a solid background in fundamental analysis and will only need to add some bond knowledge to their arsenal. Those switching from other strategies face a steep learning curve. It's manageable if you have a knack for and enjoy analysis, but be prepared to study a lot. Because you need to master fundamental analysis for two asset types as different as stocks and bonds, this can be a challenging strategy for beginners.

This is a buy-and-hold strategy, you won't be trading a lot because that would create tax liability and defeat the purpose of the strategy. Like Value Investing, if you are great at fundamental analysis this can actually be a low maintenance strategy. You work hard to select stocks and bonds and then you just sit back and collect income.

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Income Investing Strategy

Value investors, often referred to as Contrarian Investors, are always on the lookout for underpriced stocks. This is a research-intensive strategy, in order to excel you will need to get very good at interpreting a company's financial statements, financial metrics and statistical measures. Value Investors use analysis to determine whether a company is trading above or below its fair value and they only buy when they find a strong company that they believe is undervalued. Undervalued is a term that you'll hear value investors use a lot because identifying and buying undervalued stocks is the cornerstone of the strategy.

Value investors don't care much about the short-term behavior of the market unless there is so much volatility that new undervalued stocks are emerging. They spend the majority of their time researching companies and very little time or effort trying to keep up with the market. The theory is that the market will go up over long periods of time regardless, so rather than wasting time worrying about what the market will do, they put their efforts into finding great underpriced companies that will outperform. The S&P 500 has averaged a 10% return per year since inception so the theory is a pretty strong one.

This is definitely a buy-and-hold strategy, you cannot be a value investor if you bounce in and out of investments frequently. When you find an undervalued company, you will often have to sit on it for years while you wait for the market to realize the true value of the stock. Any strategy that requires that you hold investments for long periods of time makes it that much more important to master the strategy's stock selection criteria. As a value investor, you must be able to distinguish between companies that are underpriced for a legitimate reason (decreasing profit margins, losing market share, or losing out to competitors to name a few) and those that are healthy companies with strong long-term prospects and are simply trading below their fair market value.

Investment Selection Methods

Successful Value Investors do exhaustive research on a company before they buy the stock, and their particular type of research is called fundamental analysis. Most value investors agree that you can never know too much about an investment. Fundamental analysis is a good fit with this strategy because, if done thoroughly, it will provide a very comprehensive view of the present condition and future prospects of a company.

Several other strategies require at least rudimentary fundamental analysis to make sure that there is nothing glaringly bad about an investment, but Value Investors take their analysis several steps further. They dig deep into the balance sheet, financial statements, and cash flow statements because they want to have a clear picture of the assets, liabilities, revenues and expenses. Once they are comfortable that a company is on firm financial footing, they delve into the business model, products, and debt structure to see how well a company is run, what competitive advantages they can maintain, and what kind of pricing power they have. Finally, they will try to value intangible assets into the equation such as brand strength or intellectual capital.

Since they tend to be analytical in nature and because financial data is such a critical piece of this strategy, Value Investors love financial metrics. You can often identify these investors by the terminology they use when discussing investing. For example, you will frequently read or hear some of the most popular terms such as; price-to-book ratio, intrinsic value, shareholder's equity, Return on Equity, debt-to-equity ratio, and dividend yield. You can bet that when you hear one person use several of these terms during a conversation, he or she is a value investor that does a lot of fundamental analysis.

Risks

There is a steep learning curve for beginning Value Investors. To master this strategy, you have to master fundamental analysis and this means you are going to have to accumulate a great deal of knowledge. As we said above, you have to know that a company is on firm financial footing, has great products, a strong business model, and a sustainable competitive advantage. Next you have to take into account intangibles such as brand strength to determine the stock's intrinsic value. Finally, and most important, you have to be confident that the stock is currently underpriced. No easy task.

Because they put so much time and effort into studying each stock, Value Investors are much more likely to fall in love with it. Even when it becomes obvious that they must have missed something in their analysis or that something has fundamentally changed in the economic or industry environment, many Value Investors stubbornly hold onto a bad stock and wind up taking a loss that they could have avoided.

Bottom line, this is one of the most complex strategies. If you are not analytically minded and don't like delving deep into data, this is not the stock market investing strategy for you. There are many investors that call themselves value investors that, in actuality, are only bargain bin shoppers. They look for cheap stocks and their only consistent requirement is that the stock be much cheaper than it has been historically. This might work for a while with Blue Chips, but when it backfires, the losses can be significant. Stocks in the bargain bin are underpriced for a reason, they have earned their depressed stock prices through poor performance or legal woes and the stock will go much lower if their situation continues to deteriorate. If you choose this strategy, never lose sight of the fact that you are searching for companies that are undervalued, not companies that simply appear to be bargains.

Benefits

The greatest strength of Value Investing is that you are buying undervalued stocks. This implies that the price of the stock is already low so you have great upside potential and some insulation against losses even if the stock doesn't take off. In other words, if you get it right, not only have you bought an investment that is likely to outperform the market, but is also likely to hold up better than most stocks in a bear market because the price is already depressed.

Another strength of the strategy is how much research goes into each stock. Most of your research will be on tangible measurements such as revenue, debt and assets to name a few. Unless company executives are itching to be behind bars, they will provide accurate data when they publish their quarterly and annual financial results. Based on your fundamental analysis, you will have a thorough understanding of the company's financial situation, their business model, their products and how competitive they are versus their peers before you ever buy the stock.

Many people considering this strategy worry that there won't be enough undervalued companies or that they will be snapped up so fast that inexperienced Values Investors can't get in at the lower share prices. You don't have to worry, the nature of the market guarantees that there will always be undervalued companies somewhere. The industry or company that was hot yesterday may be out of favor today and then hot again tomorrow.

Examples? Major banks and investing brokerages were part of everyone's core portfolio yesterday but they have been shed like old clothes since the subprime mortgage crisis began. Even those that didn't suffer large losses, such as JP Morgan Chase, experienced sharp drops in their share prices because they are part of the banking and finance industry and are therefore guilty by association. Check the industry in two or three years, it will be as strong as ever.

There are also many companies that will vanish from the headlines only to come back stronger than ever as a result of new management, deep pockets, and an innovative new product. An example? Apple comes to mind. Value Investors got pretty excited when they saw that Steve Jobs had agreed to come back in 1998 and run the company again after then-CEO, Gil Emelio, was ousted. After languishing for years, the company's share price exploded as Jobs pushed innovation that resulted in the Ipod, Itunes, Iphone and many other exciting inventions that begin with the letter I.

Long-Term Outlook

Value Investing is widely accepted as a proven market beater if implemented well. Warren Buffet made this strategy famous and many successful investors have beaten the market for decades implementing their own personalized versions of this strategy.

This is one of the few strategies that you can use throughout your life even though your investment goals will inevitably change. While you may move most of your money into bonds and high dividend yield stocks when you are near or in retirement, this strategy will still serve you well.

Investor Profile

This strategy is for do-it-yourselfers that love detailed analysis and research. This is also a buy-and-hold strategy that requires a deep reservoir of patience. You will likely have to sit on a stock for years as you wait for the market to realize the stock's true value. However, if you are great at fundamental analysis this can actually be a low maintenance strategy. You work hard to select stocks and then you just sit back and wait for the market to figure out what you already know.

If you are easily influenced by others you will have a very hard time executing this strategy. Value investors need to be self-confident and self-motivated because they are Contrarians, they ignore what the herd is doing. Huh? Let's explore this point before we move on, it's important. Value Investing requires that you hunt for stocks that are currently unpopular in industries that are currently out of favor. If, for example, you are talking to a Growth Investor that wants popular stocks in hot industries, he will think you are a terrible investor. He will inevitably try to steer you to higher-potential stocks that are making the kind of gains that his are making. From his perspective, he's right, you are a failure as a Growth Investor but this has nothing to do with your strategy. Successful Value Investors don't care what other people think about their strategy or their stock choices, they care about long-term results.

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Value Investing Strategy

Since I pointed out one of my favorite strategies I thought it was only fair that I point out my two least favorite strategies. Market Timing is one of them. No investor has ever been able accurately time the market for long periods of time. However, I will provide a thorough review because there is always a small population of people that want to reap all the benefits of investing without taking any of the risks regardless of what reality and conventional wisdom have proven over and over again.

Market Timers use fundamental analysis, technical analysis and historical data to build predictive mathematical models. These market timing models are designed to predict what the market is going to do and time when it will react to changing conditions. They don't try to time the performance of an individual investment, they try to predict the broad market indexes such as the S&P 500 and then base individual investment decisions on the overall market direction.

A Market Timer's goal is to be in the right investments at the right time. For example, they never want to be in stocks when the market is bearish and they never want to be in cash or bonds when the market is bullish. When a Market Timer's model and analysis is giving bullish signals, they invest 100% of their money, and they usually put everything in broad indexes such as the S&P 500 or the Russell 2000. If they are receiving bearish signals, they will move their money into investments that don't correlate with the market such as cash, money markets and bonds.

Many Market timers try to enhance their returns by trading options. If their model is giving bullish signals they will trade an index or stock long, which is a fancy way of saying they will make a bet that the market will go up. When the model gives bearish signals they will sell short, which means they make a bet that the market is going to go down. Beware, options are risky, especially if you have very little experience trading derivatives. They can lose money much faster than a stock, especially if you bet wrong and the option contract is close to expiration.

Investment Selection Methods

Market Timers build models based on fundamental analysis, technical analysis and historical data that are designed to predict the market cycle. Every market goes through the same phases and a Market Timer attempts to predict when they will enter and exit each phase.

The four phases of a market cycle are accumulation, mark-up, distribution, and mark-down.

• Accumulation occurs when first movers are beginning to buy up bargain stocks that appear undervalued. Investor sentiment moves from bearish to neutral during this phase.
• Mark-Up occurs when a lot of investors decide to follow the early movers. This creates big gains as investors flood into the market. Investor sentiment goes from neutral to strongly bullish during this phase.
• During distribution the market becomes very choppy. It will test the high several times before it eventually reverses direction and starts contracting. Many investors take their profit and start moving into less volatile assets near the end of the Distribution phase. There's a great deal of fear during this phase due to the unpredictable nature of the market, sentiment becomes bearish.
• In the final Mark-Down phase investors flee the market in droves. This is a painful phase for those that stubbornly hold onto aggressive positions hoping for a turnaround. They take big losses because most of the volume is selling and the market is in full-blown correction mode. Eventually, many investors give up and bail out of their positions and stock valuations approach historic lows. Sentiment is very negative and bearish during Mark-Down. This phase ends when the next cycle's first movers recognize that the market is approaching a bottom and that there are bargains available.

A successful Market Timing model needs to perform two functions consistently and accurately. First, it needs to accurately predict the top and bottom of each market cycle. Second, it must provide bullish and bearish buy/sell timing signals that the Market Timer can act on. In other words, your model must be omniscient. If you build one, please forward a copy, that would really save me a lot of work.

Risks

The market is complex, there are an enormous number of interacting factors that affect each cycle. This naturally results in a lot of false indicators. Volatility and unexpected conditions that aren't accounted for in a model's data can trick it into thinking the market has reached the end of a cycle. In addition, each market cycle tends to be slightly different than the last, there are always new factors to consider. This makes a model that predicts future behavior based only on historical data practically useless.

The duration of market cycles is constantly changing and different markets will be on different phases of their cycle. The S&P 500 for example doesn't coincide and isn't a good predictor of the Small Cap market cycle. In fact, past S&P 500 market cycle durations aren't even a good predictor of future S&P 500 market cycles.

The greatest danger for Market Timers is options trading. Options are even risky investment vehicles for experienced traders. Market Timers tend to want to short bear markets and go long in bull markets because they believe they know what is going to happen. Depending on how badly they leverage themselves, this can have severe consequences to your portfolio when you bet the wrong direction.

Benefits

This can be a great capital preservation strategy if implemented conservatively and if you are able to trade in a tax deferred account. A cautious Market Timer spends a lot of time in low risk Bonds, Money Markets, and Blue Chips waiting for the perfect moment to enter the market. Conservative Market Timers also avoid trading Options. They may miss out on a lot of rallies with this approach but they never have to worry about losing big chunks of their nest egg.

Another positive of this strategy is that, when Market Timers are fully invested in the stock market they tend to be in broad based Indexes. Even if we don't agree with trying to time the market (we instead suggest a fully diversified Buy-and-Hold approach), investing money in broad market indexes is always a good thing. Read our Index Investing Review or our Complete Index Investor's Guide if you'd like to learn more about our favorite strategy, Index Investing.

Long-Term Outlook

This strategy doesn't appeal to many investors, but it will never go away completely. There will always be a small percentage of the population that want to invest in bull markets and sit on the sidelines for bear markets and believe they can predict future market directions well enough to do so.

There are more investors that accidentally attempt to time the market than there are investors that actively follow this strategy. The accidental market timers are those that panic sell when their portfolio loses more money than they are comfortable losing or that flood into aggressive investments out of greed during the Mark-Up phase. Accidental Market Timers constantly buy high and sell low so if you know one, do a good deed and guide them to another strategy.

Investor Profile

The types of investors attracted to this strategy are on opposite ends of the risk tolerance spectrum. This approach appeals to extremely conservative investors that would like to spend most of their time in low-risk low-return investments but occasionally venture into more aggressive assets when the market looks agreeable. The strategy also appeals to Day Traders, a high-risk breed of investor. They will frequently try to time the market with options because their statistical and technical analysis is designed to identify and capitalize on trends and short-term market behavior.

Since I don't recommend this stock market investing strategy I won't point out professional investors that practice market timing, and they probably wouldn't want to be associated with a negative review anyway. However, I will tell you that a few hedge fund managers have been able to make this strategy work, but I believe that is because they incorporate much more into their models and their strategy than just Market Timing. Hedge Fund Managers also spend 80 to 100 hours a week studying their models and the market, they are always the first movers. If a new trend develops you can count on a hedge fund manager to be the first to take advantage and therefore reap much more of the benefits. For this reason, I associate them more with Momentum Investing even if they call themselves Market Timers.

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This is a post from the ETF Topics site. All Rights Reserved.

Market Timing Investing Strategy

If you are new to investing, odds are you're implementing a blend of several strategies rather than focusing your time and effort on just one. Take my advice, choose one strategy and stick with it, don't try several at once. Like I mentioned above, when you combine strategies with different (often opposing) goals and selection criteria, you are virtually guaranteed to trail the market. Really, that bad? Yes! Over 75% of professional fund managers and investment advisors lag the S&P 500 as it is. Trust me, you have to excel to beat the indices and to excel you have to master your strategy.

Another reason many investors implement multiple strategies is that they think it will somehow decrease risk or increase returns. This is a mistake. Don't ever be fooled into thinking combining strategies will insulate you from losses or optimize gains, only proper diversification and asset allocation can do that. Study several strategies, then pick one. Are you an aggressive investor with a long way to go until retirement? Consider becoming a Growth Investor. Do you want a low maintenance portfolio that will guarantee you the market's return? Consider becoming an Index Investor (this is my style and why I like ETFs so much). Are you risk averse and hoping to buy companies that are undervalued so that your portfolio can grow while limiting downside potential? Consider becoming a Value Investor. These are just a few examples, there is a great strategy for every type of investor, you will never need to combine them.

Ready to take a good hard look at the most popular strategies? Below is a compilation all of the investing strategy review articles that on this site. Each article will explain the major goals, investment selection methods, strengths, weaknesses, risks, and long-term outlook for the most common strategies. Very likely, you will be excited about several strategies since great investors have used them to outperform their peers and the market for decades. That is exactly why each review concludes with a look at the investor profile best suited to each strategy. Pay particular attention to this section. You will not be able to master a strategy if it is at odds with your personality, risk tolerance, or investing goals.

Here is a list of the strategies we're going to review. Feel free to jump around to ones that you're interested in or read the guide straight through.

• Value Investing: "I won't buy unless the stock is selling for less than it's worth."
• Growth Investing: "I'm willing to take some risks for portfolio growth."
• Income Investing: "This money has to last a long time, I'm playing it safe."
• Mutual Fund Investing: "I want professional expertise guiding my portfolio."
• Index Investing (Index Funds and ETFs): "I'll let the market do the work for me."
• Momentum Investing: "I want to own hot stocks until they cool off."
• Market Timing: "Ride the Bull and hide from the Bear."
• Day Trading & Technical Analysis: "I have no fear of risk, I will take big chances for big gains."

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Choose One Investment Strategy and Work Hard to Master It