Stock Market Investing
Have you been keeping track of the stock market lately? The Dow Jones and S&P 500 are at their record high. Hooray! If you are a beginner investor, you might think you shouldn’t miss out and it’s time to put some money in the stock market. However, if you have been investing in the stock market for a while, you are probably afraid that stocks are too high.
Investing in the stock market requires a lot of patience and guts. In the past, I usually just ignored the volatility and kept adding to my investment portfolio every month. This worked well because I made enough money to buy more stocks during the downturn. Now that I’m retired, I no longer have the extra money to throw at my stock portfolio during a down cycle. I will have to invest smarter and more conservatively so I can avoid those 50% downturns that seem to be the norm over the last 15 years.
Investing in the stock market has been a slow learning process for me. When I first started investing, I bought stocks based on the water cooler rumors, which was fine before the dot com bubble burst… Now I know more than I did, but I still need to keep learning. Unfortunately, I don’t think I have the right aptitude for it. I tried reading Benjamin Graham’s Intelligent Investor and I just couldn’t get through it. It’s hard to bridge the gap between index investing and fundamental analysis.
Luckily, Jason Kelly sent me his book to review – The Neatest Little Guide to Stock Market Investing: 2013 Edition. It took me a long time to finish this little book, but I understood most of it. He starts from the beginning and guided the readers through how the stock market works and how to speak the language. You’ll learn what EBITDA/EV, current ratio, and PE ratio means and which one to pay attention to.
The book also examines the strategies of past “master” investors including Ben Graham, Warren Buffet, and Peter Lynch. The author suggests several strategies that beginners and intermediate investors can use. The one I like is value averaging. Many investors use dollar cost averaging, so we are quite familiar with the averaging concept. Value averaging is simply buying even more shares when the price is down and buying less (or selling) when the price is too high. You can read more about it on Jason’s resource page.
The book wraps up with the logistics of stock investing and suggestions on how to build your portfolio. The most valuable thing I got from this section was a reminder to set up trailing stop orders on my portfolio. I have been quite nervous about the stock market lately and setting up a 5% trailing stop on my IRA will help me sleep better at night. I really can’t stomach a big drop now that I’m not contributing to my 401k anymore.
All in all, I like this little guide quite a bit. It is accessible to regular people and I will be keeping this book as a referral. I will have to reread it again at some point because I didn’t get everything in one pass.
Q&A with Jason Kelly
1) You covered selling as well as buying in your book. This is great because knowing when to sell is my biggest problem. Do you have any recommendations on where to keep the proceeds after selling off some investments? The money market account does not pay much interest these days. Some of my readers have been holding cash while waiting for the market to pull back and this seems like a sub-optimal way to do it.
Jason - It’s true that cash accounts don’t pay much anymore. Most of the time, this is fine if a person is just moving from one long-term stock position to another and will leave the proceeds in cash for only a few months. For the longer term, however, a good alternative to cash is a safe bond or bond-like fund. These don’t make much, but they don’t lose much — if any — when the market swoons. That’s the goal, right? The “safe” part of a portfolio should not go down in bad markets, but should make a little more than a bank account.
One of my favorites is Vanguard GNMA (VFIIX). As its name implies, it focuses on Ginnie Mae mortgage securities, which are backed by the US government and are, therefore, just as safe as Treasuries. VFIIX hasn’t lost money in a calendar year since 1994, navigating even the meltdown of 2008 in style. It doesn’t gain much (only 2.4% last year), but any gain is better than a bank account or money market fund, and it yields 2.6%.
Big gains are for the stock portion of a portfolio, so this portion needs to put safety first and performance second. I think VFIIX returns quite a lot to shareholders, considering the safety it delivers.
2) You didn’t mention asset allocation in your book. Do you recommend that readers figure out an asset allocation plan before they start investing in the stock market?
Jason - The book focuses on the stock portion of a person’s overall net worth. So, yes, it’s a good idea to decide on big-picture asset allocation before tackling stocks.
For example, paying off consumer debt almost always returns more than stock investing. Some credit cards charge 20% or more per year in interest, and stocks rarely get anywhere close to that kind of performance. The long-term average of the market is a little over 10%. This is why the guaranteed return of not paying 20% or more in interest rates is better than the potential return of just 10% in stocks. Some people will do better than 10% per year in the stock market, but it’s not guaranteed. Eliminating debt provides a guaranteed benefit, and a darned good one.
3) The stock market seems to be very high right now. I checked the MACD and RSI for DIA (the Dow Jones) and they are telling me to sell. The SMA is just showing an uptrend at this point. Should investors wait for a pull back to buy at this time? (Jason went over these technical indicator charts in the book.)
Jason – Yes, I would wait for a pullback. Even if the market has higher to go, it won’t get there in a straight line. People would do well to conserve cash and add to it between now and the bad headlines that will inevitably show up, providing a chance to enter desired stocks at better prices.
To feel better while waiting, I recommend keeping a watch list, as explained in the book. This technique has worked wonders for me over the years. Seemingly impossible buy prices for dream stocks appear more often than you would think. For instance, when everybody was excited about Apple (AAPL) at $700 last fall, smart investors added it to a watch list with a target price. Mine was $500, which everybody said was absurd because Apple would never get that low. When it fell below $500 in January, I moved my target down to $400, and am still waiting.
Do this for dream stocks of yours, then let the market go wherever it wants. Create enough of these stocks on a watch list and some of them are bound to reach your targets, providing you with a chance to get them on the cheap.
Jason has graciously agreed to sponsor a giveaway for a lucky winner. If you want to learn more about stock market investing or are trying to form a strategy, you can enter below for a chance to win The Neatest Little Guide to Stock Market Investing: 2013 Edition. You can also check with your library to see if they have the 2013 edition.
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