Strategy basics: Theory of time and timing

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Most people dream about buying stocks at the cheapest moment of history and selling at the highest price ever seen by mankind. This is called "market timing". In reality, nobody knows when market is going up and down. If people knew how to do it, beating the market would be easy. Regular people do not want to spend their entire life looking at stock quotes for 15 hours a day, so I have gathered few tips how to make your life easy. These tips do not suit for people who want to get rich fast, they suit for people who have the same goal as I have: Get wealthier over time.

1. Buy and hold

When you make a purchase, make a purchase which you can hold for next 10, 15 or 30 years. Easiest way to achieve this is to buy index funds or ETFs.

2. Purchase small, purchase often

When you invest small amount of money each month, you will get "cheap stocks" and "expensive stocks". When market is down, you get more stocks with same amount of money. When market is up, you get less expensive ones. Over time, you will balance out to a market profit.

3. Do extra purchases

When there is a crisis, stock market tends to over react. Markets can go down by 50% in less than a year, actually, even in two months. Always have a cash reserve so you can continue buying on lowering prices, but don't be too hasty. Usually bear market stays for some time.

4. Keep up with your strategy

Do not stop buying just because you seem to be loosing money. Average person usually gets scared and sells all their stock "to avoid loosing more". Actually, even if today's price of your stocks is lower than what you paid, you haven't lost money yet. You loose or gain money only by selling. As long as you hold, there will be better times. On top of that, you can take advantage of dividends and consider your new purchases to be cheap!

5. Figure out correct time frame

Only invest money you can loose, and never invest all your money into stocks. The money you invest, has to be money which you do not need at the moment, or any foreseeable future. You should have cash reserves for any extra costs waiting behind the corner, like broken dishwasher or car, or a sudden medical bill.

6. Avoid hysteria

When stocks take drastic moves up or down, hysteria knocks at the door. On bull markets, people are queuing for stocks, on bear market, everybody wants to dump all their belongings as fast as possible. If you have a balanced strategy, you do not have to worry about market movements.


Later, I will be writing about allocation, which is key aspect of risk management.