Before you buy a stock, figure out what would cause you to sell.
Thursday, May 21, 2015
Investment advice, courtesy of Barclay's
The blog post below raises an issue of how one should invest money. The best advice I can give is
The biggest mistake novice traders make is to sell when the stock goes down and buy when it goes up. This is a strategy guaranteed to lose money.
A better strategy for investing (its not the only one), is to invest in a “target retirement fund.” This has the advantage of diversification (stock market will not reward you for bearing diversifiable risk, so it is important to diversify), and rebalancing.
Rebalancing is a little bit more subtle. A typical target retirement fund would allocate (100-your age) to stocks (riskier) and the remainder to bonds (less risky). So for a 23-year old, the allocation would be 77% stocks, and 23% bonds. As you age the allocation shifts towards the the less risky asset.
Periodically, the fund “rebalances.” This means that if stocks have appreciated relative to bonds, they will rise above 77% of the portfolio, so the fund sells some stocks and buys some bonds, to bring the portfolio back to your 77/23 desired allocation. Notice that this strategy results in selling assets that have gone up, and buying those that have gone down, exactly the opposite of the strategy followed by Mr. Dumbass in the story below.