So, what’s your investment strategy?

Can you clearly summarize your investing strategy on a sheet of paper? Many investors can’t, which can lead to trouble. Indeed, many have no strategy at all.

When others seem to be getting rich in some kind of stock, some investors pile on, not understanding much about the underlying businesses. When the market swoons, they sell — which is often the wrong thing to do. They may even move all their money into bonds, not understanding that over long time periods, bonds usually significantly underperform the stock market.

These wrong-headed investors often have unrealistic expectations, too, perhaps thinking that the stock market will grow by 20 percent or more per year. (The long-term historic average annual return is around 10 percent, and over any given period, it may well be considerably higher or lower.)

Motley Fool co-founder David Gardner has said that your portfolio should reflect who you are. Even before you build it, your strategy should reflect who you are and why you are investing. If you don’t have a strategy that you can summarize in one page, you need to develop one. Here are some elements of a strategy:

•Your stock investing time frame. (For stocks, it should be at least five years, and ideally 10 years or longer.)

•Your involvement. (How much time will you regularly spend on investing? If it’s not very much, you might be better off with mutual funds.)

•Your tolerance for risk. (This should influence the kinds of stocks you invest in.)

•Your investment method. (Do you look for large, established leaders? For up-and-comers? Do you dollar-cost average? How many stocks do you aim to own?)

•Your goals. (What kind of average returns are you seeking?)

•What will make you sell a holding?

•What will make you change your strategy?

Developing and articulating your strategy will help keep you from moving money back and forth whenever the stock market rises and falls. Find the right strategy for you and stick to it.

Ask the Fool

Q: How does investing with margin work? — R.M., Erie, Pa.

A: Buying stocks on margin involves investing with money borrowed from your brokerage, on which you pay interest.

The upside of margin investing is that it can amplify your performance. As an extreme example, imagine that you hold $100,000 of stocks and you borrow $100,000 on margin to invest in additional stock. If your $200,000 portfolio doubles in value to $400,000, you’ll have earned an extra $100,000 (less interest expense), thanks to margin. But if your holdings drop by 50 percent, they’ll be worth $100,000, and you’ll still owe $100,000 (plus interest). That will leave you with … nothing. Your holdings dropped by 50 percent, but margin amplified that to a 100 percent loss. Margin cuts both ways.

If you’re borrowing on margin and paying 10 percent interest, you should be pretty confident your borrowed stocks will appreciate more than 10 percent. If your margined securities fall below a certain level, you’ll receive a “margin call,” requiring an infusion of additional cash. If you can’t raise the cash, the brokerage will sell some of your holdings to generate the needed funds. This can sting, possibly resulting in short-term capital gains taxed at high rates.

Only experienced investors should use margin, and many do well avoiding it altogether. If you really want to use it, it’s smart to limit yourself to borrowing no more than 20 percent of what your actual holdings are worth.

Q: Is it too late for me to refinance my mortgage? — W.C., Mesa, Ariz.

A: It depends on the interest rate of your current mortgage, among other things. For many people, it’s not too late at all. Learn all about home financing issues at www.fool.com/homecenter and www.quickenloans.com.

My dumbest investment

This is embarrassing. I had a little extra cash and felt I could easily select, by sheer intuition, companies that would soar. My logic was sound: Find big companies that were selling cheap. TWA airlines was selling for $3 a share, and I figured its name alone would ensure its survival. I bought and then bought more when the price fell. I also sank some money into Global Crossing, and eToys promised big things but vaporized. I passed on eBay, Amazon and Google. Of my five great investments, four went bankrupt. I didn’t experience any beginner’s luck at all. I am licking my wounds with a lot of Lucent stock that I don’t know what to do with. Warren Buffett has nothing to fear from me. — S.D. Rozsa, via e-mail

The Fool Responds: Oh dear. You’ve learned some valuable lessons. First off, avoid penny stocks — those trading for less than $5 per share. Think twice about the airline industry, too, as it’s riddled with tough challenges such as fare wars, empty seats and fuel costs. And when a stock plunges, don’t buy more unless you’re confident of an eventual turnaround.