Investing strategies come and go, but most go, and very few sticks around for more than a decade. The ones that work and produce sustainable returns for their advocates are the techniques that rise to the top of the pile. Spend a couple minutes perusing your favorite bookseller’s website and you’ll discover something quite interesting that of the many titles like “How I earned money in the market,” there are very few that have impressive sales numbers. Here are four investment methods that are favorites of individuals, brokers, and institutions. See which ones work best for your financial goals.
Dollar Cost Averaging
If you dislike having to track the ups and downs of the Dow Jones average, or any other major equities metric, use DCA, which stands for dollar cost averaging and simply purchase the exact same monetary number of shares per month. Most brokerages will help you set up an account into which you deposit X dollars on a fixed day each month. It’s up to you to determine what companies’ shares you wish to buy, but most folks have a portfolio of about a half dozen stocks they favor.
Widely misunderstood, short selling is neither illegal nor dangerous. In fact, it’s becoming more common now that online brokers are allowing its widespread use. If you believe that company XYZ’s stock price will fall tomorrow, you would want to engage in a short sale. Be careful not to confuse this trading term with its identical real estate counterpart. To continue the example, you would agree to deliver, say, 100 shares of XYZ to a buyer two days from now, when you believe the price will be much lower than it is now. Assume today’s price is $10 and you think it will fall to $8. You charge your buyer $1,000 ($10 x 100 units) right now and place the cash into your account.
Realize that you do not have to own XYZ in order to do a short sale. You’re merely making an agreement to deliver the stock in two days. After the required 48 hours passes, if your prediction is on target, you purchase 100 shares for $8 apiece and hand them to your buyer. The purchase costs you $800, so you still have $200 left in your account, which represents pure profit. It could have gone the other way, and you might have lost money, but that’s basically how short selling works.
Using Dividend Reinvestment Plans
Many brokerages let people set up accounts which automatically reinvest dividends back into the companies they pay them. This is an effective way of reducing commission costs and building up the value of your portfolio without having to take any action. Be sure to only buy equity in corporations that have long track records of paying dividends.
Buying Blue Chips Only
The blue-chip system has been around for more than a century. Its philosophy is simple. Buying nothing but the top-ranked, most stable companies’ stocks will help you avoid getting stuck with highly volatile, less secure issues. By definition, blue-chip companies have been around a long time, are part of major indices, pay dividends, and have capitalization of more than $10 billion.