3 Approaches to Investment Management

Sean Hannon

Posted on Tue 31st Mar, 2009 09:00:54 PM

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New investors face a dizzying arraying of investment choices. Do they buy stocks, bonds, or commodities? Within stocks, is it growth or value? Should the bonds be investment grade or more speculative? Will commodities be more efficient via ETFs or futures? Begin combining these various options and the possibilities are limitless.

Instead of becoming overwhelmed by the choices, assess these three broad investment approaches and decide which works for you:

1. Macro investing – Multiple academic studies show that asset class selection is the main driver of long-term performance. In fact, one such study shows that 91% of a portfolio’s return is attributed to being in the right asset class as opposed to picking the right stocks and bonds. Macro investors embrace these statistics. They focus on broad themes, compare the relative value of securities, and position a portfolio accordingly. By spending their time on the broad topics and focusing on asset class selection, macro investors strive to be in asset classes that will perform well while avoiding those that perform poorly.
2. Technical analysis – This approach uses market action, primarily through charts, to forecast future price trends. Believing that supply and demand ultimately create bull and bear markets, technicians focus on price and volume data with the hope of determining the future path of prices. Once the trend has been determined, trades are constructed to benefit from the market’s direction.
3. Fundamental analysis – Fundamental investors believe the value of the underlying business will ultimately be expressed in the stock price. Focusing on the financial stability, operational efficiency, and earnings power of the business, fundamental investors aim to purchase shares when the stock price is below fair value and sell once the stock price reflects the business’s value.

Each of these approaches has yielded success. By either focusing on the discipline that most suits your investment approach or combining aspects of each method, investors can create a stylistic approach to investing that will offer structure and guidance in any market environment.

Sean Hannon, CFA, CFP is a professional fund manager. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.

Other recent posts by Sean:

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View all Posts by Sean Hannon.