Investment Formulas - What Purpose Do They Serve?
By Kevin Erickson
What exactly does a formula do? A complete
detailed explanation can be as vast and
complex
as each individual investor and is
beyond the
scope of this article but a brief
summary of a
formula's usefulness would
include the two
primary functions it fulfills.
First, over a full market cycle, it will improve
your
investment profits without the application
of any
thought whatsoever on your part. A
good thing
for most investors, because the
less emotion they
inject into their investment
decisions - the better
off they are. Because
there are many investors
who don't believe
that the market will ever go
through a full
cycle again - that the direction
of the market
is in a permanently upward
movement, except
for temporary, minor dips.
It might be worthwhile
to point out - without
seeming to be pessimistic
- that there are some
good arguments against
an indefinite continuation
of bull markets… as the past few years have shown.
The second purpose of a formula - apart from the question of profiting from complete market cycles - is to provide a means of profiting from more minor fluctuations. It is undeniable that the market will continue to fluctuate and a formula allows the investor to benefit from these fluctuations by specifying conservative investment policies when the market is relatively high, and more aggressive policies when it is relatively low.
For many, formulas appear rather complicated and so the obvious question that comes to mind is "Can the small investor profitably use them?" and the answer is resounding yes. True, some formulas are so complex that they are unsuitable for most investors but most formulas do not fall into this category. The most widely used formulas today, in fact, are based on extremely simple principles and can be used by anyone with a rough knowledge of elementary school math. Special measures to adapt formulas to the needs of small investors are necessary, at times but it is worth noting that small investors are just as likely to want to improve their profit performance in the market as are the larger investors. And what's nice about formula's, is that there is no particular disadvantage in having a small portfolio when using them.
Security or Uncertainty All investors, both large and small find themselves in the same basic quandary. All would like to be sure of what is going to happen next to their capital and so they are inclined to appreciate the features of fixed-income investments such as, bonds, savings accounts or commercial paper.
In such investments, their capital is guaranteed and so is their interest. On the other hand, there are few opportunities for appreciable profits in these areas and no protection against a decline in the value of the dollar. As a result, many investors / speculators are attracted by the characteristics of common stocks or currency trading or whatever… where neither their capital nor their return is guaranteed, but which offer substantially better opportunities for higher profits through capital gains.
How to resolve the dilemma? It is obvious that the great difficulty with all investments is there inherent uncertainty. One workable suggestion for reducing the damage this uncertainty can do has been often made. Simply don't buy common stocks or other higher risk investments at all. However, most investors tend to regard this idea as, although practical, rather extreme and are reluctant to abandon the possibilities of profit that exist in these investment vehicles.
The formula idea is simply a form of protection against uncertainty. Formulas are designed to allow the investor to profit from the advantages of owning common stocks or other higher risk investment alternatives like currency trading, while providing them with a measure of protection against their handicaps; to give them some of the stability offered by fixed income investments, while not condemning them to a low return on their money. The whole point of formulas is to make the best of both worlds.
This article may be reproduced only in its entirety.
Kevin Erickson is a contributing writer to: Forex Trading | Work At Home | Nursing School
Article Source: http://EzineArticles.com/?expert=Kevin_Erickson
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