Investment Strategies Flashcards
Dollar Cost Averaging
Dollar cost averaging is the practice of purchasing a fixed dollar amount of stock or stock funds at specified intervals. The logic behind dollar cost averaging is that by investing the same dollar amount each period instead of buying in one lump sum, you’ll be averaging out price fluctuations by buying more shares of common stock when the price is lower, and fewer shares when the price is higher.
Dividend Reinvesting Plan (DRIP)
If you want to use common stock to accumulate wealth, you must reinvest rather than spend your dividends.
Under a dividend reinvestment plan (DRIP), you are allowed to reinvest the dividend in the company’s stock automatically without paying any brokerage fees. Most large companies offer such plans, and many stockholders take advantage of them.
Ladder structure of bond
A ladder structure is a portfolio of bonds that mature at regular intervals throughout the various maturities of the yield curve. To perpetuate a ladder structure, as each bond matures, the proceeds are used to purchase a bond that will mature at the next interval after the one with the longest maturity in the portfolio. Ladders are most effective when the yield is normal or sloping upward and interest rates are fairly stable. Ladders are typically constructed using U.S. Treasuries or even CDs at a local bank.
Barbell structure of bond
A barbell is a strategy of holding more bonds at the short and long end of the yield curve with intermediate bonds being underweighted. This allows a portfolio’s price to match the volatility of an intermediate-term liability. When there is a likelihood that the Federal Reserve will loosen monetary policy in the near term, a barbelled portfolio may increase a bond portfolio’s return.
Bullet structure of bond
A bullet-structured portfolio benefits when the yield curve is expected to steepen. A bullet structure usually weighs heavier around intermediate term assets. A bulleted maturity tends to outperform a barbell structure when the yield curve steepens because in a rising rate environment, intermediate-term securities usually hold up better than long-term securities. Also, in a declining interest-rate environment, intermediate securities produce significantly greater price appreciation than do short-term securities.
Expansion phase of economy
The following economic characteristics define the phase:
Gross Domestic Product (GDP): Increasing (above trend)
Interest Rates: Low / Accommodating Policy
Credit Access/ Availability: Growing and more easily Available
Credit Spreads: Tight
Employment: Increasing
Sales: Growing
Corporate Earnings: Increasing
Inventories: Low
Inflation: Increasing
Peak phase of economy
Cycle Peaks tend to be the most challenging to predict. Most investors believe they will continue to see profits and unlimited upside based on the recent expansion. This creates the “greed effect” or a “can’t lose” attitude. This is referred to a “euphoric period” in the stock market when there are very few investors concerned about a decline.
The following economic characteristics define the phase:
Gross Domestic Product (GDP): Peaking/ Slowing growth rate
Interest Rates: Increasing
Credit Access/ Availability: Growing availability
Credit Spreads: Tight
Employment: Slowing Growth
Sales: Increasing
Corporate Earnings: Peaking / Slowing growth rate
Inventories: Growing
Inflation: Moderate
Recession phase of economy
The following economic characteristics define the phase:
Gross Domestic Product (GDP): Declining (below trend)
Interest Rates: Higher
Credit Access/ Availability: Tightening
Credit Spreads: Widening
Employment: Declining (unemployment increasing)
Sales: Declining
Corporate Earnings: Declining
Inventories: Growing
Inflation: Declining or Deflating
Trough phase of economy
Eventually, the economy and the markets hit a point where they cannot reasonably go much lower. Value and contrarian investors step in and begin to buy again. In addition, in more recent history, this is the point when the government has stepped in and provided liquidity and support to individual companies, industries, and the market as a system. This was done to avoid systematic crisis. This Government intervention is somewhat controversial, but it has helped to slow and reverse the recession moving the economy back towards expansion once again. It should not be counted on, but as investment planners, we must be aware of its more recent impact.
The following economic characteristics define the phase:
Gross Domestic Product (GDP): Stable
Interest Rates: Declining (Policy easing)
Credit Access/ Availability: Tight
Credit Spreads: Wide
Employment: Weak
Sales: Down
Corporate Earnings: Declining
Inventories: Declining
Inflation: Stable to increasing
Fundamental Analysis
One of the major divisions in the ranks of financial analysts is between those using fundamental analysis and those using technical analysis. Fundamental analysis looks at the fundamentals of the business, which are best disclosed on the financial statements, the balance sheet and the income statement.
Passive Investing
The assumption is that the market is very efficient and hence any extra work done on identifying equity portfolio is going to result in very little return over the market. Hence, people doing passive investing will invest in securities like the index funds.
Active investing
The active investor things that can identify securities that may be bought at a discount. So, they do fundamental or technical research and identify securities to buy.
Technical research
Is research focused on the past. How has the company done is used as in indicator for the future progress.
Top down forecasting
Top-Down: The financial analysts are first involved in making forecasts for the economy, then for industries, and finally for companies.
Bottoms up forecasting
Bottom-Up: The financial analysts begin with estimates of the prospects for companies and then build to estimates of the prospects for industries and ultimately the economy.
