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Investment Strategies - Formula Investing Strategies

These strategies involve periodic contributions to a particular investment with the goals of building wealth and controlling risk.


  1. Dollar Cost Averaging - Entails a set dollar or percentage contribution to an investment (mutual fund or stock or bond portfolio). Investors may accomplish this in taxable and tax deferred accounts alike. An example of its implementation in the latter category would be a tax-deferred retirement plan such as a 401(k) or 403(b).

  2. Dividend Reinvestment Plans (DRIPs) - In this strategy, the investor purchases stocks with a history of paying consistent dividends. The dividends are used to purchase additional shares of the stocks in question, accumulating and compounding wealth. This approach is inexpensive, but its success depends upon the investor's ability to identify stocks that pay consistent dividends.

  3. Formulaic Fixed Income Strategies
    • Ladders (staggered maturities) - A portfolio of bonds with staggered maturities is purchased. The shorter duration bonds less subject to fluctuation offset the greater price volatility of the longer dated issues. The ladder offers a mix of returns with higher yields overall than that offered only through a short-term portfolio. Maturing bonds provide cash with which to purchase longer dated bonds, maintaining the portfolio's original structure and duration. Portfolio restructuring can be arduous, perhaps forcing a complete liquidation.
    • Bullets - The purchase of a series of bonds with similar maturities. A bullet portfolio's average maturity declines each year and can be used to match duration to the investor's spending needs.
    • Barbells - The portfolio is invested in short- and long-term bonds. Active management is needed to rebalance the portfolio as each year the maturity of the long-term bonds reduces.
    • Riding the yield curve - A buy and hold approach applicable to a positively sloped yield curve (yields on short-term bonds are lower than on longer term ones). Investors purchase long-term bonds and hold them as their maturities shorten and they travel down the yield curve going from long-term to intermediate-term to short-term. The bond will increase in value compared with new issues of the same maturity as the older issues paid higher yields when originally acquired. A rate rise could cause this strategy to go awry, resulting in losses to the investor.
Leverage as a Strategy
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