Tag Archives: rule-based investing

Intro to rules based Investing – Why follow an investment strategy?

1. Basics

What is rules based Investing?

In rules-based-investing we define a clear set of rules. These rules comprise an investment strategy. Here is an example strategy:

“At the first day of the month, look at the performance of bonds versus stocks by calulating the 3-month performances of two exchange traded funds, SPY (the SPDR S&P 500 ETF) and TLT (the iShares 20+ Year Treasury Bond ETF).
If SPY outperforms, then re-balance the portfolio to 60% SPY, 40% TLT. If not, rebalance to 40% SPY, 60% TLT.”

Rules based Investment Strategy SPY TLT
Rules based Investment Strategy SPY TLT

 Why follow an Investment Strategy?

 It eliminates our main weakness, emotion.

Developed through years of evolution, our basic human instincts are necessary for our survival. Keeping with the laws of the jungle, these instincts push us to run when in danger and charge when we see opportunity. The stock market, much like a casino, is built to take advantage of these instincts. Investors, if left to their primitive fear/greed instincts, tend to buy high and sell low.

 

 

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