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Investing in Stocks

A simple method of investing in the Stock market 
by 
tom mcquaid

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Why Stocks and why not other investments:

 • Stocks, over the long haul, out-preform other investments. Stocks have historically returned ~10.3% a year compared to 2-4% for real estate over the past 60 years. : Stocks vs. Real Estate.

 • Stocks generally carry more risk and rewards. 

 •  Some of the risks of owning stocks may be mitigated by using a simple part of the technical analysis (use of simple moving averages only) and diversifying using ETFs

•Banks, CD's, Money Market Funds, and Government Bonds, and cash are not paying enough interest to keep up with inflation. 


 A simple method of  when to buy and sell stocks:




This chart is for the period of 1994 to 9/3/2017  of the SPY ETF (SPY is and index of the broad-based   Standard and Poor's 500.  EFT's explained below ).

Standard and Poor's 500 is broad-based representative of large-cap stocks. This chart shows how you would have been able to cut off most of the major down-runs since 1994 and yet take advantage of some dramatic upward moments. Using this model, putting all your money in the S&P 500 index (SPY) combined with buying and selling using 25 week SMA (simple moving average), in the period 1994-2017. You would only have needed only 6 trades not counting the 2 short buy/sells to take advantage of the dot.com run-up. You would have also avoided its collapse and avoid the more recent real estate/bank collapse. In the period after 2011, there are a couple of short periods where you would be in and out of the market, but it only cost about $10.00  to make a trade, and you would still be on track and in a rising market.  Hint:  holding off a few points will help you avoid buying and selling excessively.

•  Buy when the stock price moves above the SMA (simple moving average) line, and sell when the stock price crosses to below the line.  Disregard all the rest of the "technical analysis" lines and jargon you might find other places.  The general goal is to buy and hold, and not trying to time the market with any precision. This is a method of buying and selling is to avoid buying or holding on a clear downtrend, and getting in and staying in on up-trends. Following this method will keep you on track during major bubbles.  On this chart  20 month SMA is right if you do not want to monitor closely, A shorter SMA will give you tighter control, but you will be in an out a lot more. Every stock or index has somewhat different optimum SMA lines. You can try different SMA time periods to see which give the best fit for your needs.  They are relatively easy to experiment with on most online charts, which you can find on your online brokerage account or other places like Google Finance

• I have had very good results using this method though it flies in the face of the Random Walk Theory which is a theory that the best price of a stock is what it is selling for and any variation in price, without new news or events, are random from that point.  But there are definite trend lines in nearly all markets.  Using the technical analysis above will help one take advantage of these runs.

• This method of buying and selling based on the SMA (simple moving average) trend line relies on the fact that stocks often have a momentum and will get oversold going down and overbought going up.  If the random walk theory were correct, you would not see long trends when there was certainly no underlying change of fundamentals or news.
 

 

RULES TO REDUCE THE RISK: (but sometimes risk is more fun and can be more rewarding)

    -Don't invest money you might need over the next couple of years.  It ruins the "long haul" part of the idea, and it sets you up to take a forced loss.
    -Don't invest in individual stocks unless you can afford to have more than 10 different stocks (SPY gives you 500 stocks).
    -Don't Try to buy at the bottom or the sell at the very top.  Wait for the moving average to show you the real trend.  


Buy EFTs rather than mutual funds or Individual stocks

• Use ETFs (Exchange Traded Funds) to give you quick and simple diversity.  EFT's are a market basket of stocks to match some index like the Dow or Standard and Poor's 500. They buy, sell and taxed like stocks. A majority of money managers of mutual funds do not match the indexes they are working in, and they charge you for the privilege of owning loser stocks, and many are loaded so that you may pay a penalty if you do not hold for a defined period. Worse mutual funds make dumping them much more challenging.
Below are some ETFs that might be of interest. There are now an EFT for almost every industry and every sector.  Your on-line broker usual has source and filters if you don't find my list useful. Some tight small sectors may be problematic and should be avoided.

A List of ETF's to keep things simple

SPY         An index of Standard and Poor's 500-- a broad-based index that gives one a diversification of U.S. Stocks.

QQQQ    An Index of the NSADQ.  It is more weighted in tech stocks ( (Intel, Apple Microsoft, etc.). It is somewhat more volatile but can be more rewarding if you are willing to buy and sell more often.

VGK        An Index of European stocks.

You will have a fairly diverse portfolio if you just stick with these ETF's. For particular situations, you might look at These FTES.

To get the best result you might buy one of these based on which has the chart that best fits this method, and then trade into one of the others as it shows a better fit than the one you have.


HOW TO CHART WITH SMA:

The above chart uses Google's Chart which can be accessed by https://www.google.com/finance/portfolio  You can enter and stocks or ETF in the portfolio and then enter the SMA in the Technical data.   You will want at least 70 in this box to keep from having to make a lot of trades.  Alternatively, you can use your broker's online chart by going to the advanced carts.  

Use online Brokers:

• Use only online brokers (E*trade, Fidelity or others) not full-service brokers (Merrill Lynch, etc.). 

a) A full-service broker will cost you 10 times more for each trade.  You need to feel that to buy or sell is not restricted by the expense of a trade. 

b) The full-service brokers have a  vested interest in selling his product or just trading.. he works on commission.

c) You are making the decisions don't pay big bucks for someone to hold your hand.




Bonds:
• Bonds and Bond Funds:  Most investment guides recommend a good part of your portfolio be in bonds or bond funds depending on your age or risk tolerance.  I am not convinced.  Though high rated bonds should be safe if held till maturity, as interest rate fluctuate so will the price of the bonds.  As interest rate go up bond values will go down (depending on the time until maturity, a 1% change in yield may result in 5% change in bond value). Post 2008 the rating system of bonds is a major suspect in the crash of high rated bonds based on collections of risky mortgages.


Comparing tax free investments with taxable investments:

•To compare a tax free investment, such as municipal bonds or mortgages, to taxable investments:

(tax free rate)/(1-Your tax bracket) = taxable rate,  
 If you are in 30% bracket   then:   3%tax free= 4.29% Taxable-- --> .03/(1-.30) = .03/.70= 4.29%


or
(Taxable rate) X(1-your tax bracket) = tax free rate.    

or a calculator found n the sidebar    

 

Hints on putting in orders for buying stocks.

• When you put in an order you will be asked some questions abut the order you are making.

Type of Order?:  Generally, if you have decided to buy, the best option here is "Market."  You aren't shopping FOR POTATOES and trying to get the best deal.   If you try to set a price, and your theory is that the stock is going up, you could be left behind if it moves up before your order is filled.  An exception to this rule would be in purchase or sale of thinly (low volume) traded stocks. Where there is not much volume, you could be at the mercy of someone taking advantage of no other bids.  You probably shouldn't be making trades in thinly trades stocks anyway.


Margin or cash?:  Set up your account as a margin account.  It is best to select margin. A margin account gives you a little flexibility if you need to tap your account for cash but the market is going up, and you want to hold the stock. You do not need to use your margin (borrowing against the stock) but can pay cash.  If it is bought as margin-able stock, you do have that option in future.  Trust accounts often cannot be set up for margin trades, but otherwise, it is best to give yourself that option when you set up the account.

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