Christian Financial Advice and Biblical Stewardship

Keys To Navigation

  • 2000 13 Jun
Keys To Navigation

Reprinted with permission from World Finance Net IPO Newsletter, written by Kent L. Wilson

Most of todays investors are not familiar with the strategies required to be successful in uncertain market conditions. A good rule of thumb when things get crazy in the markets is to remember the basics and stick to a game plan. One of the biggest mistakes inexperienced investors make is a loss or lack of discipline as market conditions change. This is especially true in the latter stages of the unprecedented extended expansion we have seen in the United States. If a few simple strategies are followed, there should be little doubt about the direction and outcome of any size portfolio.

The first basic rule any investor needs to follow is to remember their investment objectives and time horizon. This assumes you have an objective and time horizon for your investments, and if you have not thought about these issues to this point, it is important you do so. Most people who are relatively new to the investment arena typically have longer term time horizons (they are putting the money in for the long term), with high growth objectives (they want the money to grow fast). This is the best combination to have in any type of market, because the longer time frame allows the investor to reduce short-term volatility. For example, if you are invested in a stock that is very volatile in the near term, when you hold that investment for an extended time period, (lets say 10 years), the average volatility over that ten year period will be significantly less than any single year of the ten you may choose to examine. The reason for this is that the volatility associated with a market that is moving sideways, (as is the case in our markets currently), represents one extreme in the market place. There will be other times over an extended period of time that will result in less volatile conditions. The end result produces a seemingly smaller range of price swings in any stock. The key here is to remain focused on your plan of long term investing and not turn myopic in choppy market conditions like those we have experienced over the last several months.

The second rule is to remember why you choose to buy the investments in your portfolio. If the company you bought was fundamentally sound when you bought it, it should still be as fundamentally sound now (unless there has been a significant change in management, technology or legal issues have surfaced). While the overall market conditions will always bounce stock prices around, this does not signal a deterioration of basic company fundamentals; it merely suggests the stock is experiencing turbulence from the prevailing market conditions. When you take a trans-Atlantic flight, you will encounter some periods of bad air and the plane will bounce around a little bit. This does not mean the aircraft is no longer fundamentally intact, quite the contrary, the plane is able to withstand those small squalls and continue on a mostly smooth flight. Ultimately, you reach your destination safe and sound. This is the same in investing; you may encounter pockets of bad air along the way, but if you have a fundamentally sound investment vehicle, you will arrive at your desired outcome safe and sound.

One last thing to consider when investing over the long term is that the investor still has control over the destination and final outcome of the investment. Take advantage of the perceived negative market conditions and use them to your advantage. When you decided to invest in a particular company, you hopefully did your due diligence and set a desired price target for that stock. If the fundamentals have not broken down and the stock is being shoved around by the prevailing market conditions, take advantage of drops in the stock price to dollar cost average. Dollar cost averaging is a technique used by investors who do not have large portfolios already built up. Most of the time, this technique is used to purchase mutual funds on a fixed monthly budget. Heres how it works: every month the investor will set aside an amount, (lets say $100, typically the minimum most funds allow) and that money will purchase how ever many shares it can, based on the current per share price on the day the monies arrive. This may buy more shares or fewer shares on a month-to-month basis, depending on the current share price. It allows the investor to buy more shares when they are on sale at the lower cost and to purchase fewer shares when they are more expensive. The end result yields a lower average cost per share and increases the opportunity for capital appreciation, which after all, is the main objective.

Following these simple rules should result in your feeling more relaxed, even as the market dips and soars.

For this week's IPO analysis and additional investment research, visit World Finance Net.