The primary message for people who are interested to
invest in the stock market is that they should ignore market
timing and buy stocks for the long term. This strategy is
simple and yet effective because stocks give good returns
over a long period of time. This article will highlight
strategies on how to allocate their money which could prove
to be useful for investors between savings and stocks.

　The most simple strategy is the Buy-&-Hold strategy. One
does not need to do anything no matter what happens after
the initial investment is made. For example, you have $100
and you then decide to keep $60 in savings and use the
remaining $40 to buy stocks. Whether the stock market goes
up or down, you do not use your savings to buy more stocks
or sell stocks to put money back into savings.

　If you follow this strategy strictly, it gives you
downside protection because your wealth will not fall below
$60. At the same time, it still gives you unlimited upside
potential because of the $40 that you have invested in
stocks. Given that stocks in general will give you higher
returns than savings in the long run, this is why many fund
managers advise investors to put a significant portion of
their wealth in stocks and hold on to them.

　Another commonly mentioned strategy is the Constant Mix
strategy. In this case, you maintain a constant percentage
of your wealth in stocks. To use the same example, you
initially put $60 in savings (60%) and $40 in stocks (40%).
If the stock market falls by 20%, your initial $40
investment is now worth $32 and your wealth has dropped to
$92, i.e. $60 in savings (65%) and $32 in stocks (35%). Note
that your percentage in stocks has fallen from 40% to 35%.
In order to maintain your initial 40%, you have to use your
savings to buy more stocks. This strategy requires you to
buy stocks when their prices fall and sell stocks when their
prices rise. Put simply, it is a strategy that forces you to
follow, the rule of 'buy low and sell high'.

　While the Constant Mix strategy seems to be the best
strategy to follow, the Buy-and-Hold strategy is better
under certain situations. For example, the market is
oscillating up or down, the Buy-and Hold strategy, rewards
you better. Therefore, if you believe that the stock market
is on a long-term uptrend, the Constant Mix strategy is not
a good one to follow. However, the Constant Mix strategy is
very useful in a flat but oscillating market. For example,
you buy more stocks when the market drops and you sell them
for profits when the prices recover. This strategy takes
advantage of the up and down cycles in a market that is
going nowhere.

　The third strategy is the Constant Proportion strategy.
Basically, the strategy requires the investor to maintain an
exposure to stocks based on a multiple of the amount he is
willing to risk. It follows a formula like this :

Dollars invested in stocks = mX(Present wealth - Floor) 　　
where m >1

　The floor is the level of wealth where the investor cannot
tolerate risky investment and is not willing to put any a
cent in stocks. For example, the investor needs $60 (Floor)
for retirement and is not willing to risk this amount in any
investment. His present wealth is $100., Assume that m=2, he
will invest 2X($100-60) or $80 in stocks and save $20. If
the market drops by 10%, his stock investment will be worth
$72 and his total wealth will be $92 ($72 stocks and $20
savings). Based on the formula, his stock investment should
be reduced to 2X($92-$60)or $64. Thus, he has to sell $8
worth of stocks and put the money into savings.

　In essence, you sell stocks as they fall and buy stocks as
they rise (many like to put it as 'buy high and sell
higher'). While this contradicts the convention of 'buy low
and sell high', it is a strategy that is very suitable for
trending market. The strategy also gives downside protection
because when the investor's wealth drops to the floor, it
requires him to keep all his money in savings.

　Because it forces investors to get out of stocks as the
market falls, investors enjoy some downside protection. The
Constant Mix strategy is a form of 'buy low/sell high'
strategy which is good for a market caught in a trading
range. As the strategy recommends buying more stocks as they
fall, there is no downside protection for investors.
Unfortunately, many investors do not have any idea which
part of the market cycle they are in. Thus the in-between
'Buy & Hold' strategy seems the most appropriate and simple.
It is also the one with the lowest transaction costs.

　There is no reason to believe that any of the strategies
is best without considering the individual's requirements.
For an investor who needs a minimum sum of savings to meet
his mortgage payment next month, it will be inappropriate to
ask him to invest more of his savings in a bear market,
although the strategy might prove profitable in a year's
time.