How To Invest In A Roller Coaster Stock Market
On the day of Microsoft’s IPO in 1986, you could have picked up 100 shares for the low, low price of $21.00/per share. If you held the stock until today you would have gotten the benefit of nine different splits, turning your original 100 shares into 28,800 shares, which at today’s current price would be worth around $1.4M.
Actually, $1,468,800 but who’s counting?
Of course you would have had to hold onto the stock through some pretty rough times. The market crash of 1987. The bursting of the dot-com bubble and 9/11. The financial crisis of 2008 and the flash crash of 2010.
Each one of these major crisis — as well as any number of minor ones — could have, well, let’s be honest, probably would have caused you to sell long before today.
Even worse, what if you didn’t buy at the IPO and bought at one of Microsoft’s many price peaks instead? You might actually be underwater in one of the most successful stocks of all-time.
If only there was a way to buy into a stock (or the stock market) in a way that avoided volatility and guaranteed a reasonable price — not the bottom, not the top, but the average price?
And since you are reading this, you probably already know that there is a way.
This technique is loosely based upon the “Dogs of the Dow” theory which suggests that by taking your investing capital each year on January 1st, dividing it tenths, and then buying the 10 Dow stocks with the highest dividend yield, you will outperform the indexes by December 31st.
If there is a stock you want to buy, or better yet, a group of stocks you want to buy and hold for the long-term, you take your investable capital, divide it into 12 equal amounts, and then invest 1/12 each month on the 1st, or 31st.
At the end of the year you will have a cost basis pretty close to the average price of the stock (or stocks) during the course of the year. The trick to this way of investing not to second guess your allocation schedule.
It may be tempting at times, when the market is dropping like now, to think it makes more sense to accelerate your buying. Or maybe, if the market is taking off, you might be reluctant to invest any of your money.
But the process — a pretty straightforward mathematical process — drives the performance.
Loading up when the market is down sounds great until it goes down even more. Likewise, waiting for a stock to come down from it’s highs to invest can be a critical mistake if that stock keeps moving up.
By using this investing method you’ll have piece of mind knowing that you no longer have to play the guessing game of when to buy and when to wait and can avoid the ups and downs of a rollercoaster market.
Brian Lund is a veteran trader with 30 years of market experience and VP of Business Partnerships at SparkFin.
The SparkFin app is a free and easy way to get new stock ideas every day. So do us a favor — download SparkFin from the iTunes store — and then go crush the market.