Picking the right buying and selling strategies
Now that you know all the securities you can buy and how to create a portfolio, you need to determine a buying strategy. These can be quite simple or in-depth. As mentioned in my beginner investing guide, you can’t time the market. Everybody wants to buy at the lowest point and sell at the highest peak. But that is something that sounds nice in theory but is impossible in practice. You simply don’t know where the price will go. If you did, you would be a billionaire.
Value stocks and setting alerts
That does not mean you should simply buy everything regardless of price. When you are looking for undervalued companies based on fundamental analysis (looking at the income statements and balance sheets), you also take into account the current price of the stock. If you determined the company's stock should be worth $100 but is now trading for $110 then the stock is overpriced. You could then set an alert to send you a message when the price of this stock drops below $100.
ETFs
If you are buying an ETF following the S&P 500, the current price does not matter that much:
Let’s say you started investing in 2011 and you were looking for a good time to buy. In 10 years time, there were only a few small dips. These dips had much higher prices than if you would have just bought them in 2011 despite the all-time high. The price might seem high right now, but the market can go up for the next 10 years or go down in the next 5. Nobody knows. You can try to time the market but that did not work out for most investors.
It’s crucial to know how the economy works and what forces drive the markets. You already know that in the current market (2022) things look troubling. A world wide pandemic, historically low interest rates and historically high inflation rates. In the meantime central banks have already been injecting billions and billions of dollars in the market for several years. While in the meantime, despite all the economic troubles, markets are reaching all time highs almost every month. This won’t last forever.
Lump sum investing or dollar cost averaging
If you have a fair amount of money, you can decide to invest it all at once or take a conservative approach and invest a part of that amount each month. Both have their benefits and risks:
Dollar cost averaging:
- You will always pay the average price of the stock
- You will always get average returns
- You will buy more stocks when the price is low and less stocks when the price is high
Lump sum investing:
- Buy and forget approach
- More money in the market
- Returns are based on your entry
The benefit of dollar cost averaging is that you have more control when markets are troubling. Overall, you want to have money on the side when markets collapse. A good example is the covid-19 pandemic. Once covid was making headlines, the stock markets plummeted. If you had cash on the side, this was a great moment to buy more. But if all your money is already in the market, you could not take any advantage of the huge drop in prices. On the other hand, these events are very rare. Overall, both approaches are performing about the same.
Having some cash is not a bad idea
Having some cash is never a bad idea. On the other hand, cash in your bank account is only devalued due to inflation. So it would be best to invest every single $ you have available for investing. But that also means you don’t have any buying opportunities if needed. For example, the stock market collapsed in march 2020 when the Covid pandemic spread around the world. This was a good moment to buy the same stocks with steep discounts. But if you already had all your money invested then you could not buy more stocks.
It’s a consideration you have to make for yourself but having cash on the side can provide benefits and opportunities.
You can find more general strategies in my investing guide for beginners. But the most crucial thing to understand is that you can’t time the market. You can’t time the highs and lows. Nobody can.
Key Concepts:
- You can’t time the market. Don’t spend too much time on when to buy.
- Set price alerts for stocks you want to buy/sell but you think are over or undervalued at this moment.
- There are multiple buying and selling strategies, each with their own benefits and pitfalls.
- Knowing when to sell is just as important as knowing when to buy.
- Keeping some cash on the side can help you invest in unique opportunities.