Personal Finance and Investment

To Use or Not to Use

A typical Wall Street story about a young man who has just started learning how to be a skilled speculator goes as follows. The young chap had a problem, so he came for advice to an elderly man renowned for his sharp investment intuition. The young guy had taken on rather large line of stocks, but the market got somewhat over-valued and thus the bloke thought that his positions were too risky. He was in doubt if he should sell at all. The young guy was so bothered by that that he was having sleeping problems.

The old gentleman advice was straight and simple: he said “Sell”. “Sell back until you sleep well again.” And despite this advice certainly has a flavor of ambiguity, there is a plain wisdom in it. We can reasonably assume that neither the old man nor the young chap knew in which direction the market was going, but both were subconsciously aware that the market was sufficiently erratic to cause justifiable worry. Translated into more classical investment language, the old man’s advice meant - Sell some of your stocks so that a market fall-down will not wipe you out, but, on the other hand, keep sufficient amount so that if your apprehensions turn out to be unfounded, and the market grows, you will still gain some revenue - meanwhile, relax and get some sleep.

On the surface, it may sound somewhat cynical on the old gentleman’s part not to describe to his young follower a detailed and precise strategy. But you must appreciate it was impossible for him to be sincere and simultaneously pledge that he knew precisely what action be might the best under current circumstances. Besides, the young guy actually didn’t ask him to tell exactly what to do. All that chap wanted was a little help in lessening the stress and the advise, he received, was undoubtedly helpful.

Finding the Sleeping Point

Practically speaking, investment formulas are made to assist you in a way similar to that the old man’s recommendation helped his young companion - they introduce an ingredient of caution in your investing actions when caution appears sensible, they reduce the need for caution when risks appear comparatively low and allow you to profit when prices rise. Furthermore, as soon as you integrate a formula into your investment strategy, it works almost automatically, letting you sleep nights in the solid knowledge that you are constantly insured against numerous unforeseen circumstances.

But in the same way as the wise investor left it up to the young disciple to make his mind up on what exactly his “sleeping point” could be, you can pick up a formula to suit your own temperament, financial situation and predisposition to insomnia. Any formula can be fine-tuned to go with the preferences and requirements of any investor.

Despite that formulas are intended to provide an unrestricted, unambiguous and detached guidance for action, no investor should think he is completely giving up personal control over his investments to the formula the he adopts. The argument for this logic is obvious. It’s because every investor should choose the formula, which will match the level of his individual comfort. A formula is not to tell you what exactly to do - it simply helps you perform your everyday tasks more efficiently. For instance, no formula can possibly tell you which stocks to trade or currency to purchase.

The entire argument of using formulas stands on the fact that people using them are usually rather sophisticated and that they are well aware of what kind of investment areas they are interested in, how to choose those and where to look for advice in their specific field(s) of interest. Nevertheless, by enhancing their understanding with considerations of the equally essential issues such as when to buy and in what amount - formulas can provide a valuable additional strength to their investment outcomes and help with managing their portfolio on a professionally higher level.

In addition, it is important to note that even though the true value of a formula is to provide the investor with an investment policy which is explicit in its directives all the time, there is no need to follow the formula precisely in order to benefit from it. On the other hand, you certainly should not ignore the formula completely if you expect to profit from it, but you can beneficially make use of it as a criterion or an overall guide without swearing eternal loyalty to its axioms. For example, you may wish to use a formula, but besides that to decrease or increase your risks at different times for a number of various reasons. Revisiting the formula frequently will give you an idea of how far you are deviating from your original schedule and will offer you a well-organized program to return to when you are ready.

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