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The Alchemist (08/01/2007)
By Al Thomas
ADDING NEW POSITIONS

When opening a brokerage account with a broker or receiving advice from a financial planner they look at the amount of money available to invest.

After a while it is recommended buying this, that and the other thing and fitted the recommendations to purchase the entire amount.

Buy it all now he says and says the investor should have all the money working. That always sounds good.

The reason it is done this way is so he won't have to look at the account again. It is a great time saver for the broker and does not give proper investment advice to the customer. Needless the say most investors do not realize the right way to place their money to work.

There is a right way to play the game, but you won't hear it from

Mr. Broker. The average broker has 300 accounts. Unless the investor Is a large 6-figure account the broker will probably not call him again.

Small customers (under $100,000) are not even on the radar screen.

Whatever amount the investor has it should be broken down into 3 or 4 parts and put into the market slowly over a period of time.

Markets do not advance in a steady upward stream. They stair step their way higher. Individual stocks can be very erratic and should not be bought by individual investors and brokers don't know any more than the clients, really. To smooth out the volatility the investor can buy either mutual funds or exchange traded funds (ETFs).

There is no such thing as a "good" stock. Any stock can turn bad in a heartbeat. Brokers and financial planers should explain

their exit strategy if they have one. Never let anyone handle investment funds that does not have a solid plan to protect the clients funds in the event the market should turn sour. Have it thoroughly explained and put in writing on company letterhead. This is the only protection the client has when he loses his money which he will when the bear comes out of the cave again - and he will.

When adding a new position the entire amount should not be

committed at one time even if it is distributed over several equities.

Spread the buying over a period of time such as 25% of funds available over each of the next 4 months. This will smooth the price paid.

If four purchases are decided upon each successive buy should be at a higher price. Do not add to a declining stock or index fund. The basic rule for success is never average down, only average up.

Permanent stop losses should be set. Another buy strategy is

not to add to the new position until the first purchase can be protected with a break even stop on the first buy. This minimizes risk and protects customers' funds. Few brokers want to do this.

When adding to any investment portfolio the number one consideration should be protection of assets.

 

 

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