Saturday, May 24, 2014

What We Don't Do

What we don't do is as important as what we do when it comes to investing.  Why?  What we don't do let's us focus on what is important and also provides time for us to do the things we like to do in life outside of investing.  For us, investing is just a means to help us enjoy life and not a life in itself.

Here are a handful of activities we don't do that many investors may spend considerable time on.  These may seem unorthodox or even radical to some active investors, but in our opinion and based on our experience, eliminating these things has helped to keep our investing process simple and rational, and make our more focused efforts count. 

This is just what has worked for us.  But whatever system or process one uses for guiding investment decisions, it might benefit by reducing extraneous activities (distractions) and noise that can get in the way of success.  

"Make everything as simple as possible, but not any simpler" 
- Albert Einstein

1) Follow daily financial, economic, and investing news. 

Why? Charts contain all the information we need to develop knowledge and investing strategies. We have found that news can be a red herring (misleading) when it come to investing as indicated here.  This practice shields us from the emotional hype in the media that could otherwise sway our investment decisions. Our experience is that price action shows up in charts and reveals what investors are actually doing, which may be, and often is, different from what the media predict.

2) Invest in stocks/stock funds, commodities/commodity funds, other types of bonds/bond funds. 

Why? Investing in individual stocks and bonds is too risky for us as something can go wrong with the issuer. Successfully tracking and analyzing too many types of funds (stock, bond, commodity) is unrealistic and unnecessary to meet our investing objectives.  We believe investing in the various types of high yield bond mutual funds (corporate, emerging, municipal, and global) provides ample diversification.  In addition, each mutual fund is actively managed by professionals and holds bonds from many different issuers, which substantially reduces risk due to default.   We then manage market risk through chart-based technical analysis, strategy development, and discipline.    In our opinion, high yield bond funds have relatively low volatility and are relatively easy to analyze from a technical standpoint.  Our experience tells us that if market conditions are changing for the worse (price trends are heading down) the charts will tell us.

3) Check on intraday price action in various equity markets.  

Why? We only invest in high yield bond mutual funds so we only need to check on mutual fund prices at the end of the day, about two hours after the markets close.  Intraday price movements do not interest us because we are medium to long-term investors.  We used to track intraday price movements of high yield bond ETFs but gave this up because it was not useful.

4) Try to correlate high yield bond fund price movements with other indices. 

Why? Again, high yield bond charts contain all the information we need. We use charts to track and analyze price patterns of high bond funds directly and then develop what we believe to be sound risk-averse investing strategies.   We see no need to make things more complicated as we have not experienced any significant advantages in trying to predict (guess) future price trends based on possible correlations with other indices (equities, interest rates, inflation, currencies, economic growth, etc). Correlations may come and go but our experience has indicated that the charts will tell us what investors are actually doing in terms of buying and selling high yield bonds so we can act accordingly.

Not Investment Advice | Important Disclaimer: 
High Yield Bonds and High Yield Bond Funds (aka: Junk Bonds and Junk Bond Funds) are risky investments that can lose value. High Yield Bonds and High Yield Bond Funds may be inappropriate investments for you depending on your specific circumstances, which we cannot be aware of. The content in this article, including the identification and discussion of any specific security (e.g., high yield bond fund), is NOT meant to be and should NOT be used as investment advice. This article is for general information and educational purposes only. Please read the Disclaimers for in their entirety. The U.S. Securities and Exchange Commission website has guidance on selecting an investment adviser if you need one.

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