How do you select equities to invest in?
I tried several criteria: position holding periods, types of equities, and quantity of equities to follow were the top categories. Recognizing what criteria created best comfort and investing results led me to a mostly swing-trading philosophy—but it took several years. For those of you new to the game, let’s go over the many different paths you can follow.
Medium-Term Hold: ETF Investing
Exchange-traded funds have surged in popularity in recent years. The number and types of ETFs have developed broadly, too. A big benefit to ETFs over Mutual Funds is that the ETFs can be traded throughout the day just like a stock, whereas, Mutual Funds are priced only once a day, at the end of the trading day. They are easy for smaller investors to get started since some index funds have high investment minimums whereas ETFs are viewed as price-per-share investments.
Long-Term Hold: Value Investing
Value Investing is based on stocks of companies which are out of favor with the market. Upon investigating the fundamental data, investors believe there is a margin of safety and a likelihood of buying low and selling high. One critical piece of data to value investors is the price to earnings ratio. When the P/E ratio is below the average for the market as a whole, value investors are very comfortable making this selection. The holding time for most value investors is very long period of time, several years.
Varied-Term Hold: Growth Investing
Growth Investing is based on companies whose earnings are expected to grow at an above-average rate compared to its industry or the overall market. A growth company typically has some sort of advantage that allows it to fend off competitors. Growth equities have a limit of time they can maintain the fast rate of growth and almost certainly fall off the stage as competitors catch up with them.
Short-Term Hold: Swing Trading
I’ve applied much shorter holding periods since we moved into the twenty-first century. Day trading was not appealing to me. Following the day-trading signals required constant attention so I could identify the buy signs and sell signs. This type of trial trading ended quickly when I discovered that commissions were a high and reduced my overall results. The physical wear and tear was harder than I expected and finding that I was a victim of ‘daily noise’ was an easy disappointment of overall profits.
Swing trading has been much more appealing to me, with a holding time being commonly between one and three weeks. It’s rewarding to obtain the profit target in less than a month, but I’ve discovered news events happen that can change the tide of the general market, more than just daily-noise. Since my open positions require some alterations my holding time may be extended longer. Extending the holding time hasn’t been uncomfortable since I can use options to keep risks small and generate profits even from trades gone bad.
Medium-Term Hold: Position Trading
Position trading is another appealing holding time for me. The fundamentals of a company don’t generally change more than every three months. Therefore, if my due diligence results in a bullish expectation I don’t anticipate a change in those basic characteristics until the next earnings report.
It took me years to consider the different ways to invest or trade my savings, but I’m sure there are others who decided right off the bat. What’s your experience been?