The publishing world is replete with strategies for buying stocks. There have been countless books written on the topic, and many blogs and other sites have published tips and strategies for buying stocks. Ultimately, the goal of such advice is generally to help people beat the market averages and earn a healthy rate of return.
I ran into an article in Kiplinger’s that covered this topic, but noted the tips it included as being new rules. I took a look, read through them, and had some thoughts of my own.
Here are their tips, paraphrased, with my own thoughts added:
Buy when markets are weak, sell into strong markets
Essentially, this strikes me as a buy low, sell high approach but said a bit differently. I would have to agree with that approach, as one of the very basic tenets of doing business! However, it’s not always that simple. I’ve written about the disposition effect before, where people tend to sell their winners too quickly and hold the losers too long.
Essentially, it seems like in today’s markets it’s not just a matter of looking at price points relative to some benchmark, and deciding to buy or sell. Rather, there can be momentum involved, and if one is trading actively, perhaps that could be kept in mind. We don’t want to cash out too early and miss riding the wave, and we don’t want to bail out too late after its clear the stock is not coming back.
Focus on Dividends
The article says it well, essentially noting that with dividends you can make money even in situations where markets aren’t rising much. I think there’s something to be said for companies that regularly pay dividends, and I suspect that the dividends themselves are an often overlooked component of stock market returns by the average investor.
Set Low-Ball Limit Orders
I like the thinking here, where if a stock has been soft lately, a limit order of 3% off its present price could potentially turn out to be a beneficial move. It does seem to be the case that with a more volatile market, investors get edgy on certain news reports and stocks in general can swing by a percentage point or two. As I’ve noted before, it seems like markets overreact to news often enough, thus providing buying opportunities.
Avoid highly charged, boom or bust mutual funds
I agree with this. It does seem to be the case with many investors, where a mutual fund’s high level of performance in one year will create an incentive to invest, but it might be too late. A fund that performs exceptionally well in one year might be a loser in subsequent years. Personally, I tend to prefer index funds anyway, as the low expense levels end up helping quite a bit with overall returns.
My Questions for You
What do you think of each of these tips?
Have you applied these approaches in your investment efforts?
Do you have any additional tips to add?