Investment Strategies: From Wall Street to Main Street Hingham MA

Craig Hartnett of Hingham MA outlines for individual investors three different investment strategies that are established and followed thereafter to avoid emotional reactions to the ups and downs in the stock market.

The first is a buy and hold strategy. This strategy is the simplest because the portfolio is constructed with an initial asset mix, for example 65% in stocks and 35% in Treasury Bills, and then is held throughout future market fluctuations. This buy and hold strategy has a linear relationship of the portfolio and the stock market.

The second strategy is a constant mix. Under this strategy, the portfolio is constructed with an initial asset mix, again for example 65% in stocks and 35% in Treasury Bills, and afterward the portfolio is re-balanced to this allocation. With the re-balancing of the constant mix strategy, stocks are bought when the market value has decreased and stocks are sold when the market value has increased. Generally, a percentage change in the allocations will trigger a re-balancing. The constant mix strategy has a concave payoff curve and will underperform the buy and hold strategy in markets that trend strongly either upward or downward but outperform in a range bound market.

The third strategy is constant-proportion portfolio strategy. Under the CPPI strategy, a floor in the portfolio value and a multiplier are set. The multiplier is used to calculate the amount to allocate to stocks based on the cushion (market value minus the floor) and the multiplier. This strategy increases the allocation to stocks when the market value increases and lowers the allocation when the market value decreases. It has a convex payoff curve and more resembles the payoff of an option.

This is meant to provide perspectives on three investment strategies and not a recommendation from Craig Hartnett to investors in Hingham MA and the South Shore community.