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Scaling your Investments

Discussion in 'What is Investing? (START HERE)' started by InvestOpen, Jul 4, 2018.

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  1. InvestOpen

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    Scaling your Investment

    Scaling investments provides a strategy by which an investor enters or exits an investment with more or less capital. The scaling process is a systematic way to manage an investment to maximize return, minimize risk, or both. While scaling an investment may not be possible in all cases, such as real estate, there are easy systems that investors can use to manage their investments and returns over time.

    Dollar Cost Averaging: One of the most well-known strategies is dollar cost averaging. The simple premise is that timing the market isn’t possible. Thus, rather than choosing a specific price to enter an investment, as long as an investment meets a general thesis, you periodically add more to the investment over time. Most people actually do this with their retirement accounts, whereby they contribute at regular intervals throughout their career into the market. Since the market has both good and bad times to invest, this strategy uses time to average out returns and avoids being caught picking a poor spot.

    Percentage of Capital: A slightly different take on dollar cost averaging is percentage of capital. Rather than using time as the defining factor for entering or exiting a position, prices is used. Investors start with a defined amount of capital they are willing to allocate to an investment. They then purchase a given amount at a specified price. If the price of the investment drops by a percentage, say half, the investor purchases more shares. This can be done through many variations of how much an investment price should go down or up, as well as how much or what percentage to utilize each time.

    Asset Allocation: Asset allocation uses predetermined parameters or percentages for portfolios investments, whereby only a certain amount of investments can be in any particular category such as stocks, bonds, commodities, etc. The strategy relies on the idea that asset classes usually have different characteristics and movements, and achieving the correct balance for a specific investor's situation can increase the probability of a successful outcome.

    Percentage of Income: As most people advance in their career they make higher salaries. Rather than contributing a fixed amount throughout a lifetime, using a percentage of one’s income allows you to increase your investments over time relative to your financial station. A slightly different take on this strategy is to use a percentage of disposable income. This tweak adjust for any additional benefits or burdens associated with higher salaries, or changes in life (such as having children).

    Custom Strategy or Algorithm: Many investors and traders constantly search for qualitative and quantitative factors to determine when to invest and divest. The simplest version of this concept is taking on an investment based on an idea. As an example, you may buy stock in a clothing store whose sales you expect to skyrocket. If their sales increase and the share prices climb, you sell your shares and realize gains. If after time they don’t increase sales, you determine that your idea didn’t work out and you sell at current price levels.

    Don't forget to ask your financial team for advice when it comes to making more out of your investments.

    < Monitoring your Investment | Glossary of terms >

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    Last edited by a moderator: Aug 1, 2018
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