Hi, Ken. I would not factor in the current market conditions when putting together my investment strategy. Good investments are good investments regardless of the market.
I cannot offer individual or specific investment advice. Every Fool has to figure out an investment strategy that works best for them.
My feeling is if you are a Stock Advisor, Rule Breakers or Everlasting Stocks member, you are going to get more Recommendations and Best Buy Now (timely Stock) opportunities each month than you can reasonably invest in, so don’t feel pressured to invest in anything until you are comfortable with your investment decision. Read the recommendation analysis, join the conversation on the company’s Premium Community discussion board, and make sure you share the analyst team’s conviction in the company.
In any given month, that could mean opening new positions, adding to existing positions, or holding your cash back for the next month when hopefully you’ll like the opportunities better.
For Stock Advisor/Rule Breaker subscribers, one strategy would be to focus on the Best Buy Now (Timely Stock) opportunities which are also Starter Stock (Foundational Stock) companies, followed by the remaining Best Buy Now (Timely Stock) opportunities, then the remaining Starter Stock (Foundational Stock) companies. Your Analyst Team thinks the active recommendations are good long term, buy-and-hold opportunities.
You might want to build a Buy Watch List divided into four categories. First, there are the Must Haves, companies in which you have deep conviction and absolutely want in your portfolio. Second, there are the Strong Haves, companies in which you have strong conviction but wouldn’t just totally die if, like, they weren’t in your portfolio. The third category is the Nice Haves, companies in which you have positive conviction but aren’t especially excited over. The last category is Never Haves, those companies you just flat out think are wrong for you.
This way, when the market presents discount opportunities, you are ready with a shopping list. The trick is to already have the list of companies you want to open or add to a position on in advance and then your focus is on the opportunity rather than the market price.
One unofficial rule many Fools follow is buying in thirds. Let’s say you want to purchase about $2500 of a company. You could buy $1000 now, then another $750 on a future dip in price, again the final $750 down the road when the price is again at a discount. That could be next month, next quarter or even next year.
This is a form of dollar cost averaging which can even out your cost basis. Not relevant if your investing through a tax-advantaged account, but important if you are watching your potential capital gains and losses. It also lets you spread the cost of a position over time, which can be helpful if you are adding cash to your portfolio periodically rather than all in one lump sum.
In terms of how many positions to maintain in your portfolio, again, there’s no hard and fast rule. The goal is to maintain diversity so that your portfolio does not carry too much risk from a single investment. The Gardner Brothers have suggested 15-25 companies is a good, or at least aspirational, starting point. How many total positions and how much you invest in that initial position is just a question of with what you feel comfortable.
Tom Gardner has encouraged Fools to own 10-20+ stocks, hold them all for 5+ years and expect 40% of them will lose to the market. Just 10-25% of remaining positions will drive 90-100% of the returns. That last point is why it’s essential to diversify, because there is no way of knowing in advance which companies will do what. This is just a starting point, however. Portfolios can grow to as many positions as they feel comfortable managing.
One trap many fools fall into is thinking too much about how many shares they own and not enough about the value of those shares. They think they are somehow doing better buying a lot of shares of cheaply priced stocks rather than just a few shares of more expensive companies.
But the market price of a share of stock is completely dependent on the total market value of the company divided by the number of outstanding shares. The higher the market value, the higher the stock price. The more outstanding shares, the lower the stock price. However, neither market value nor the size of the shareholder pool is a measure of performance.
Regardless of whether you own 1000 shares at $1 per share, 100 shares at $10 per share, 10 shares at $100 per share or 1 share at $1000 per share, you still own $1000 of that company, and if the share price goes up 10%, you’ve gained $100 any way you split it. If there’s a company in which you would really like to invest but is too expensive for your available cash, just wait until you can save enough for a share.
Many Fools watch their portfolios daily, hanging on each climb or drop in stock price and wondering what each piece of news means to the market. I like to say invest in companies, not markets. So instead of dwelling on quarterly earnings numbers, focus on how and what management says is happening with the business. When there’s a big drop in the stock price, ask yourself whether there was any significant change in the company’s operations that triggered or resulted from the market’s actions. If not, it may be a buying opportunity.
Foolish philosophy emphasizes long term (3-5 years or longer) investing in companies rather than short term trading of stocks. Focus on the company’s performance, not the market’s performance.
Another trap Fools try to avoid is investing emotionally in reaction to significant news or large price swings. Fools try to never make investing decisions out of fear or panic, or unfounded optimism and irrational hope. It’s not that Fools embrace risk but that we try to manage it through research and rational decision making. It is said that fools rush in, but Fools invest with purpose.
The motto of The Motley Fool is to Educate, Amuse and Enrich. You’ll notice that enriching comes last and education comes first. And bridging the gap is amusement. So take advantage of the resources TMF has to offer to learn about investing as you build wealth for the future, and have fun during the process.
Who is throwing a lot at you but thinks the most important thing is for you to embrace and stick to a strategy and to ask lots of questions, because that is how you learn and grow as an investor…
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