Chapter 13 - Stocks

By Richard Valentine Reily, author of Gregory's Hero.

So, you saved up some money and are itching to buy some stocks. Good for you! Now you want to know the rules, right? That's an easy one: buy low and sell high. Easy to say though most folks find it hard to so since most buy when the market is rocking and rolling (high) and sell when the market tanks (low) and are happy to escape with only the thrashing they got. Whew!

Real rule number one: diversify your securities purchase across as broad a swath of the market that you can and then forget-about-it. Rule number two: refer to rule number one.

The greatest threat to the value of your investments over the long term is trading. Market fluctuations, trading fees and taxes on gains. Don't pay any of them. Make a serious long term well researched investment decision and stick with it.

This is not however to say that you should never revisit your decisions or check out how things are going down at the investment account. You should know and one of the surest methods is the two hundred day moving average. Using an online financial website will allow you to create graph of the two hundred day moving average price of your investment. When the value of your security drops below the two hundred day moving average by more than 5%, sell it. When it moves back above the two hundred day moving average by more than 5% buy it again.

The two hundred day moving average method lets you lock in large up moves and limits your down moves by moving you out of the security before it falls further. Remember, we are not talking about the inherent quality of your investment, we are talking about the movements of the overall market that forces movement in the value of your investment.

What to buy? Consider an exchange traded fund, also known as an ETF. There are many ETF's that cover most of the investing world including most companies and industries both domestic and foreign. What is an exchange traded fund? At its simplest it is a mutual fund that is traded like a stock with a significantly lower management fee. There are some excellent books available that will give you an in depth understanding of the instrument.

ETF's are available to mirror most indices, industries and markets. You can buy a broad basket of stocks in one share of an ETF to give you exposure to any index, industry or market you want to invest in. An ETF is a perfect vehicle to diversify your investment and limit your costs.

If you decide to invest via ETF's, how many do you want? Probably at least six and no more than eight. Properly selected you can pretty much invest in every company on earth via eight well selected ETF's. Once you have selected and invested in them, track them on a two hundred day moving average, forget about them most of the time and buy more whenever you have the money.