Wednesday, August 22, 2007

Three Ways to Make Money Investing

Previously, I wrote about Five Ways To Lose Money Investing. Here are three ways I have found to make money in the stock market.

Hire a good professional. I did this three years ago and am very glad I did. After returning from an overseas assignment, I decided I wanted to spend less time managing our personal investments. I chose a professional who had been in the business 20 years and utilized proven portfolio managers to select stocks.

My personal finance advisor manages part of our taxable investments, provides counsel on retirement readiness, keeps me informed of latest opportunities. Most important, he has spent the time to understand my risk profiles, my objectives and aspirations and invests consistent with those.

For reference, my advisor charges on an asset basis. However, to me, it is a very reasonable cost, about 1.25% of assets, which is comparable to the expenses of many mutual funds. That cost covers trade commissions, financial planning (retirement, college, estate, etc), and investment recommendations for my own use.

To note, it is important to do one's own due diligence when choosing a professional. A poor professional can lose a lot of money. I looked for someone with experience in at least two down markets, and who used diversification to minimize risk. Then I compared their historical results versus the market.

Validate a system. I have always looked for system that would improve my investing results. I have tried Value Line, various newsletters, best stock recommendations from financial magazines. None have ever worked consistently for me...until recently.

In 1998, my father-in-law gave me a Motley Fool book, The Unemotional Investor. After reading it, I put it aside for six years. In late 2004, I decided to test the system, with some changes, calling it a Modified Unemotional Investor Growth system. The system has worked well for me and I still use it for my own investment portfolio, which currently consists of Terex (TEX), Potash (POT), Shaw Communications (SJR) and Avnet (AVT).

While the modified system has not been demonstrated through a major down market, it has done relatively well in the recent downturn as shown in the 8/20/07 stock purchase update.

Invest in a diversified index fund. This can be a low cost, low involvement and profitable way to participate in equities. The stock market has averaged a 8.90% annual return since 1951. A low involvement way to participate is to buy an diversified index or a total market index fund. A slightly higher involvement (and higher return) method is to buy the best performing diversified equity index fund from the previous year.

For this approach, it is important to use a diversified or total market equity index. Sector index funds may not match long term market returns.

More On What I Have Done

With the first two approaches, it is extremely important to do a thorough evaluation to find a good advisor or a good system. Not surprisingly, there are bad advisors and bad systems, which can quickly lose one's money. For both approaches, I have started by investing a small amount of my overall portfolio. Based on positive results, I then invested a larger amount.

For the third approach, I have not been a big fan of just putting money in the diversified index. I feel I can do better with individual stock picks:-) However, overall, I think a diversified equity index would have earned a respectable return for much less effort than I invested.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

3 comments:

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Super Saver said...

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Super Saver said...

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