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What to buy and how much (03/22/2006)
By Al Thomas


     
"Hello, Mr. Mushroom, this is your friendly broker calling and have I got a tip for you. It is one of those once in a lifetime stocks and I

even bought some for my own account." Sound kinda familiar?

It's your money not his so you can say "Thank you" and hang up. It doesn't make any difference what he is selling you don't want it.

Almost all stock bought in small qualities (less than $25,000 probably more) has an emotional price tag. The prudent investor will do his homework before he makes a purchase and I don't mean the usual Wall Street "research" method that has nothing to do with making money. I have written about that scam before.

The smart investor recognizes that the total stock market is composed of many sectors and these sectors do not all work together. The technology sector composed of hundreds of separate issues bundled together to make a technology index can be rising rapidly while the pharmaceutical sector may be flat or declining. There are many mutual funds that mimic each individual sector and a great number of these are no-load (meaning no commission) funds. It costs the investor zero, nada, zip to buy and sell them. The investor will have to find them as a broker is not going to help because he makes no commission.

Now you have found the sectors that are rising and you have a list of no-load funds, but which one should be bought? Obviously the investor wants the best performer. Here is how he can be sure he is getting a fund that is appreciating in value. Go to one of the free charting services on the Internet or at the brokerage company where he now has his account and put up a chart of the fund with a 200-day moving average. One of the brokers will help you if you don't know how to do it or it can be done at the library.

If the 200-day line is rising and the price of the fund is above the 200-day line it is a buy. If the line is descending Mr. Smart Investor won't have anything to do with this puppy. There is no need to do anything further to determine whether it is a buy, hold or sell.

But how much should be purchased? No prudent investor puts all his money on one equity. Depending upon how much is available the optimum investment is to divide funds into 10 parts to invest only 10% into any one equity. Then place a 10% stop loss order on each position. If the stock or fund drops by 10% the loss is only 1% of the total portfolio. (Example: $100,000/10=$10,000X10%=$1,000).

This simple plan gives the investor diversification into the strongest sectors and limits losses (and protects profits as the stop is raised) when a particular issue turns weak.

Copyright 2006 All rights reserved. 

 

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