How To Buy Stocks In This Volatile Market

This is a guest post by Kevin of 20sMoney.com

There are plenty of people telling you to flee the stock market right now. There are also those in the crowd that says now is a great time to buy. If you have a very long-term perspective, I tend to agree with the latter. In this post, I’d like to discuss not if you should buy, but how you should buy (or sell) in today’s market.

Photo by Rednuht via Flickr

Buying And Selling Stocks In Chunks

The main thing to remember is that it is impossible to time the market. You aren’t going to call the bottom in stocks, so don’t try. However, you can implement some measures to protect you from additional drops in stock prices. I recommend buying and selling positions in chunks. Buying and selling in chunks helps you make better decisions and tends to avoid emotional buys or sells. The less emotion, the better off you will be. For example, if you liquidated all your stocks immediately after seeing the Dow down 700 points the other day, you would have missed out on the almost 500 point gain the next day. Again, buy and sell in chunks over time.

Under normal circumstances, I would typically recommend buying and selling in thirds of a position. For example, if you decide you want a position in Apple, determine how much you want to invest, and then split that amount into thirds. Buy the stock at current levels with the first third. Move the second and last third into the position if prices still warrant adding to the position at a later time. Conversely, if you are trying to sell your Apple stock because you are worried about the consumer, I usually recommend selling a third of your position at a time.

In today’s environment where we are seeing triple digit moves in the Dow on an almost daily basis (even 100 points up and down seems low these days), I recommend making your chunk 20% of your overall position instead of a third. The more volatility, the more chunks. I recommend moving no more than 20% of your position in or out at a time. You do not want to move all of your position and then see the market move against you the next day!

What Moves The Market Today

Lastly, I want to discuss what moves the market. In the short term, markets are driven mostly by emotion. Today, that emotion is fear. Fear is driving the markets lower. In some cases (financials), the fear is valid. In others, it isn’t and over time the fundamentals of that business will win out over emotion. This means you can potentially pick up some great stocks at a great price since fear is driving the prices lower. Remember, Buffett said to be greedy when others are fearful, and fearful when others are greedy.

If fundamentals in certain businesses warrant long-term value, buying these stocks in a fearful environment might be a good investment. I recently wrote an article on the next bull market. Perhaps, there are indications of what the next bull market(s) will look like. Buying into these sectors today might turn out to be a fantastic investment. However, in some cases, you might have further to go down before it goes back up. This is why we build positions in chunks. I strongly recommend implementing this approach towards stocks, especially if you are investing in individual stocks.

Stay Focused On The Long-Term

I wish to offer encouragement to you when it seems the stock market is the last place you want your money from here on out. Over the long-term, stocks are a great place to invest. Also, just think, wouldn’t you rather be in stocks now than a year ago when the Dow was at 14,000 and had only one place to go (down)? Buying now is a better buy than a year ago. This doesn’t mean there isn’t more pain to come, but stay focused on the long term and you should be great. Stick to your strategy, and try to keep your emotions in check. I wish you the best and happy investing!

Other articles written by Kevin includes:

• The Ten Point Checklist For Buying Stocks
• I’m In A Good Position Financially, What Can I Do To Take My Personal Finances To The Next Level?
• 20 Must Reads For 20-Somethings