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?
Regarding the first tip, it’s easier said than done. One has to be extremely minded to sell when everyone is in euphoria and to buy when investors are in panic. having said that, this is when you can achieve your best returns!
BTI – takes the ability to remove emotion from the mix when making decisions to have the best chance, one would think!
1. This one would work great if only my foresight were as good as my hindsight!
2. I’m a sucker for dividends. Nothing like cash flow each quarter.
3. This feels to me more like gambling than investing. What’s the reason for the stock’s soft price? Unless you know something everyone else doesn’t (and you don’t), you’re apt to catch the proverbial falling knife.
4. Yeah, best to avoid hyped mutual funds and stocks. Stay away from CNBC and you’ll be okay. 🙂
Kurt – yeah, dividends are nice – especially when consistently dished out by a given company over the years. Nice to remember these when thinking about total returns.
These techniques are for traders. I think trading is risky and I always failed to beat market trading stocks. I ended up being a long term investor in stocks instead.
SB – I actually tend to be a long-term investor myself. That said, it’s good to at least keep open to certain opportunistic moves!
In a volatile environment, setting limit orders can wreak havoc. The current markets are anything but stable.
MC – markets in recent years are seemingly more volatile, I would tend to agree.
That’s the problem with the finance magazine market. It tends to roll up and repackage basic investing ideas and pass it off as new advice. It’s a fun reminder.
1 -Trying to time the market is futile, we may get lucky every now, but it never works long term.
2 – Dividends are nice unless the market is going up like the last three months, then you miss a big move. It should be a part of every portfolio not all of it.
3 – Anyone buying stocks and ETFs should be using limit orders. Low-balling it only works in high volatility i.e. last year’s market. I don’t believe we’ll see that type of volatility for a awhile.
4 – It’s a stock pickers market for the rest of the year. Investing in any fund based on just the past years performance is not good money management.
I’d add, if your not an active investor, don’t try to be one, stick to index funds and only touch it when it’s time to rebalance.
JP – I tend to be more of an index fund type of investor, save for some opportunistic moves here and there! Good point in mentioning rebalancing.
I’m selling everything Ray! Actually, just sold 95% a couple days ago.
FS – things have been going up for quite a run, and we’ve seen 2 peaks in recent years be followed by substantial drops. It’s reaching some heights now, this crazy market!
Anthony – I like the low expenses too!
Marina – seems like a popular approach