Mechanisms to buy stock
Abstract:
* These mechanisms are important because they allow us to reduce the risk of volatility and control our emotions. We can focus on stock selection as this is what influences more on profitability or IRR.
* We will see 2 different ways to make stock purchases one that generates more work or one that is simpler. But the most practical and effective is to use a combination of both.
Mechanisms to buy stock
As we saw earlier, it is very difficult to consistently predict the short-term behavior of stock prices, so it is very difficult to know if tomorrow the stocks we buy the cheapest buy or not.
So after selecting the action or actions that we want to buy, we know that today's price is a good investment and we know the price you have in a week or within a month. So it is a good practice to make incremental purchases of shares and buy shares for an average price, this is always looking at the volume of stocks that we buy and the broker commissions charged.
We will see 2 different ways to do this and in turn eliminate the emotional part of the purchase, since one of the keys to getting good returns is not to be swayed by emotions:
* Investment constant values
* Increased portfolio value fixed
Investment constant values
This mechanism is set a value we know we can invest on a recurring or what is the same set within each of which can bring more assets to our portfolio and a value which will invest. This generated a schedule of investments and then buy the shares on the dates selected defined.
For example, we know that every 2 months we can invest € 8,000. So earlier this year we can define:
January 15 $8,000
March 15 $8,000
May 15 $8,000
July 15 $8,000
September 15 $8,000
November 15 $8,000
And then perform the selected dates the shares purchases that we have selected or failing index funds.
This alternative is easy to implement and allows us to reduce the cost of volatility. With the calendar to remove all emotion when choosing when to buy. Usually the compulsive act our feelings leads to ill-advised decisions. With this mechanism remove this.
On the other side to buy long-term average prices and dates will buy the shares randomly decided. We have a lot of bad luck and always decide the date coincides with a spike in share price, but this is unlikely. In the long run, to compensate the days we buy a little higher price to those who bought at prices somewhat lower.
Flat increase portfolio value
In the second alternative will try to take advantage of lower prices, but that also affect us because the other hand we also limit gains.
This mechanism is to define the goal we want to get monthly income. For example 2%.
Then each month we have a 2% increase in assets in stocks. Thus if one month the stock price fell 4% we buy for the equivalent of 6% of our heritage and if we earned a 6% sell shares for the equivalent of 4% of our heritage.
In this way we take a systemic buy more when stocks fall, but otherwise we sell and we annotate our profit when stocks rise. Although the key is to look at a challenging but realistic rate of return.
If we do this in the long run get more than 24% return and that will take advantage of falling prices to buy.
This mechanism can lead to higher commissions paid to our broker and we require more monitoring of our portfolio, as it makes sense to let go rata shares of all securities, which in practice is impractical for small investors.
Conclusion:
Each mechanism has its advantages, but perhaps it is best to use a combination of both.
Bi-monthly shopping on the model of fixed income and part of the separate contributions to once every 6 months to buy a plus if the increase in the assets was not as expected. Particularly this is the mechanism used.
