With the stock markets zipping up and down these days, a lot of people are wondering “what to do next?” What to do next depends on who you are and what your plans are.
Wishy-washy answer? Not really. With investing, there is absolutely no “one size fits all.” If you are an average Joe, like most of us, and if you have less the $5,000,000 bucks to play with, then you should not be reacting to market moves at all. Which leads to the question: “Which market index should I watch? The Dow-Jones Industrial Average? The Standard & Poor’s 500 Index? The Russell 2000?
Best answer is: Ignore Them All. The Dow Industrial Average only makes sense to followers of the Dow Theory, which analyzes the overall economy by comparing the movement of the Dow Industrial Average to the Dow Transportation Average and the Dow Utility Index. In an expanding economy, increasing industrial production will be verified by increasing transportation profits and utilities revenues.
The Standard & Poor’s 500 stock average is more popular among investing professionals because it covers a much larger population of stocks, compared to the Dow 30 Industrials, 20 Transports, and 15 Utilities. How these indexes are calculated is also important to professionals, but moot to us small fish investors. So don’t worry about it.
If the stock market is down today, is it a good day to invest? It might be if the market bounces up tomorrow. On the other hand, the market may go even lower which will present a better investment level, right? How do we figure out when is a good time to invest in the market? The best answer is: Don’t worry about it. The best time to invest in a stock is whenever you decide the stock you are watching is about to go up. By go up, I mean start trending up, and keep trending up.
The typical stock market chart of stock movements should look like a mountain range. Up to a peak, down to a valley, then up to another peak, and down to a valley. You get the idea. The ideal stock has a chart where each peak is a little higher than the last peak. And each valley bottoms out a little higher than the previous valley. That makes the stock interesting, but there are other questions to answer.
Does the stock pay a dividend? If you are playing with less than $1,000,000, you should not be buying very many stocks that don’t pay a dividend. If you own stock in less than six companies, all your stocks should pay dividends. If you own up to ten stocks, you can deal with one company that doesn’t a pay a dividend. If they aren’t paying a dividend, then their price movement chart should basically be big peaks with tiny valleys in between. Ten points up, one point down, etc. The neat thing about dividend paying stocks, especially the huge corporations in America, is that most of them offer a Dividend Reinvestment Plan and a Stock Purchase Plan that allows you to make your initial investment directly to the company.
In a future post, I’ll do a confessional on my early investment forages—losses, gains and losses—and how I discovered Dividend Reinvestment Plans (DRIPS) and used them to Dollar Cost Average my portfolio to a rather successful size. It took over forty years. But it was worth the ride.
In the meantime I want everyone to calm down and view the stock market as a game anyone can win. Ignore all the hype—positive and negative—become comfortable with stock investing.
Today is as good a day as any to buy stock.