Investment Formulas

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.