Shhh... It's a Secret
Updated: Oct 3, 2019
There’s a little secret about financial markets that I’m going to share. Pay attention because this may make you 1000’s of dollars over your lifetime. Do you have a chair nearby? After I share this secret you are going to need to sit down. Ready? Prepared? Here I go…
No one can consistently pick market tops and bottoms, so don’t try to. Yet a lot of investors aim to do this when they purchase their full allocation of a stock immediately.
There are so many moving parts to the stock market and variables at play you will be wrong a lot more than you are right.
For example, the most recent jobs data in the US showed that there had been more jobs created than anyone expected. The normal logic is; more people in jobs, means more money in the economy, meaning higher sales and profits for businesses which is good for company owners (shareholders, never forget as a shareholder you part own the business).
However, the US market dropped heavily as this now means that an interest rate cut is likely to be lesser or may not occur. What appears to be good news over the long term, has over the short term resulted in a loss for investors.
Think about your own portfolio, how often have you actually bought a stock at it’s absolute bottom? For the majority of people this is not often, if at all. So why go all in on a stock immediately?
Let’s say you want to buy $20,000 worth of WPL*. The traditional approach is to purchase $20,000 in one block and go from there. What this is doing is making a bet that WPL will not go any lower than your purchase price.
Why not make an initial $10,000 purchase and if the stock drops (provided there is no fundamental change in the business) buy the additional $10,000?
Worst case the stock sky rockets after you purchase it resulting in less capital appreciation but you then have $10,000 available for other opportunities that arise.
Best case, the stock moves down a couple of percent and you buy the additional $10,000 worth of WPL at a cheaper price, reducing your overall entry cost of the position. Plus if the stock announces a surprise earnings downgrade or bad news for the business, you have minimised your potential losses.
Unfortunately, lot of advisers and stockbrokers will recommend immediately moving into a full allocation of a stock not because it is perfectly priced but because it means less work for them.
The truth is, even when the best portfolio managers find a stock they love, they rarely move all in.
Investing isn’t a swimming pool where its always best to dive right in, in fact for the average person it is much better the take the stairs.
*WPL is mentioned purely for illustrative purposes, this is not a recommendation to buy WPL