Identify Your Investment Strategy. DEVELOP YOUR FINANCIAL PLAN
Your investment strategy conforms to your objectives and asset
allocation plan. Your perception of how efficiently stock and bond
markets process relevant information with regard to the pricing of
their securities determines your investment strategy. If you believe
that securities markets are efficient, meaning that all current and
new information is reflected quickly and efficiently in stock and
bond prices, you would pursue a passive investment strategy. For
example, when there are undervalued stocks, they will be bought
immediately, driving up their prices to their fair or intrinsic values.
Consequently, there will be very few underpriced or overpriced
stocks in an efficient market. An efficient market means that few
investors will be able to consistently beat the market returns on
a risk-adjusted basis (seeking returns that are greater than the
market by investing in securities with the same level of risk).
Investors who believe that the markets are efficient would hope to
do as well as the market averages, seeing that they cannot beat the
market averages. Such investors would pursue a passive investment
strategy of buying and holding a diversified portfolio of
stocks that resemble market indexes.
Lack of Trading Plan