How to Create an Investment Strategy

Investing requires a strategy or a series of strategies. A strategy is like a roadmap that guides you from home to your next vacation spot; without one you could get lost or waste your time and money.

There are principles to be followed in setting up your investment portfolios, and I have discussed them previously:

? Portfolios - what kind and how many
? Diversification - why, types and how
? Rules - when and how to buy and to sell

I suggest that each portfolio have about eight investment positions of stocks or mutual funds or ETFs. The key principal here may sound contrary but is critical to the overall performance of your portfolio, of each of your portfolios. This principle is:

Each investment position is derived from an individual strategy, and most likely the strategy is unique to that investment. In other words, one shoe does not fit all your strategies, all your groups of potential investments.

Let me give you a few examples. Out of eight investments one is based on a group of foreign ETFs and another is based on a group of Fidelity's Select mutual funds. Each group will result in one investment choice and each group will have a different strategy for determining that investment. The reason each group will have a different set of strategy rules is because the ticker symbols in each group are unique and move differently. Yes, you can use the same buy/sell rules for each strategy but you will not come even close to maximizing your potential profit.

This example will focus on technical analysis using relative strength with buy and sell rules. The method of deciding what to buy can be the same for each group, for example:

? Alpha
? Alpha with standard deviation
? Relative strength momentum
? Return

However the strategies for the different groups may differ on how many trading days or weeks are analyzed to recommend new purchases.

Likewise you may find that having a preferred holding time for a position could vary anywhere from a week to three months. The same will apply to what kind of stops you may set to prevent losses. There are a number of other variable sell rules you can set in a strategy that will impact the overall performance of the strategy.

In most cases the various rules, when customized for each particular group of ticker symbols will result in the best potential return for that group. When I have tested such buy and sell rules I can't recall ever having two identical set of rules that resulted in the best performance for each group. Since some software programs will let you do back testing you can find the rules that work best for your objectives to give you the best possible returns on your investments.

What this means is that just because a stock is moving up doesn't mean it is the best stock to own from your group of stocks. There may be another stock that is moving up faster. Along that line, a mutual fund you are holding may be moving up very slowly and may not trigger any sell rules because its slow growth may still be safe growth and the other funds in your group may be going down or showing erratic up/down moves. The individual back testing effort and customizing of your buy/sell rules (parameters) will see all this and help you develop the best strategy for each of your particular investment groups.

Source: http://ezinearticles.com/6317395

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