If you are a beginner in the world of investing, it is natural to be a bit apprehensive about getting started investing in stocks. Even though you now have a good strategy, you may want to see this strategy work before committing a major amount of funds to it. After all, bear markets are an unpredictable reality and it could so happen that you will begin trading at just the wrong time. For those who are fearful of this and may wish to begin by taking a very conservative stance in the market, it is a fine thing to do especially if you have limited experience in investing. You can never err by giving yourself time to learn something before plunging headlong into it. It's a fairly safe bet that if you don't feel like you know what you are doing, then you are probably right and would be well advised to start on the conservative end of the scale.

Once you are comfortable with these concepts and your ability, you can start getting more aggressive. Until then, the following chapter addresses some ideas for adjusting our system in order to accomplish a more careful approach when you are just starting out.

Start Small
One of the simplest ways to reduce your risk as a beginner is to implement the Reverse Scale Strategy with just 50% of your capital. So if you have $20,000 available for stock investing, you may want to just pretend you have $10,000, pick five stocks using the procedure in the text, then invest just $1,500 in each one of them. This will leave you with $12,500 in cash to begin with which will earn interest for you as you are learning. Should you have the misfortune of entering the market as a bear market is beginning, your interest earnings will help to offset any temporary losses or worries. From this cash-rich position, you can learn while remaining comfortable that you won't lose your entire stake.

Time-Based Diversification
Another way of reducing risk is by gradually implementing the Reverse Scale Strategy one stock at a time. Suppose you have $20,000 in your account and your long-term goal is to have your money spread out over seven stocks. So, in this case you employ the formula from the last chapter and multiply your $20,000 times 65% and then divide that number by seven. This means that your initial position in each of the seven stocks would be about $1,885. There is no reason you have to rush out and buy all seven stocks at the same time. Instead if you are a little nervous, add one position each month. This will mitigate the possibility of starting your investment program at the beginning of a bear market and make it unlikely that you will have a bad experience right out of the gate. So, the first month of your program you would only have one stock, with $1,885 total invested and $18,115 in cash. The next month, you would at that time choose another stock that is making new highs in price and meets our other criteria, leaving you with $3,770 invested in two stocks, and approximately $16,230 in cash, and so on until you have your seven stocks. Since we manage each stock separately in this Strategy, if your first stock does well and hits its next Decision Point before month two, you may actually end up having $3,770 invested in the first stock before having purchased the second issue. This will be relatively rare, but if it happens it is cause for celebration, not panic, and you should implement your strategy just as you would if you were starting with all seven issues right off the bat. That is, do not let the success of the first purchase hinder you from adding your second issue in month two, even though you may already have $3,770 invested in the first one. In either case, you will have your seven positions in hand when month seven finally arrives.

Needless to say, if you want to be very careful, you could add one position every two or three months, instead of one every month. It all depends on what makes you feel most comfortable given your own personal level of risk tolerance.




Market Momentum

An additional line of defense is to wait until the broader market is showing signs of strength before beginning. Bull markets usually do not end overnight, so if you wait until the S&P 500 makes a new 52-week high before you select and purchase your stocks for the first time, you will have a good chance of success as you start. In the last Chapter, Trading Rule #4 was added to keep us from recommitting funds from a sale until the S&P 500 makes a new 52-week high. There is no reason that you can't apply the same principle in order to determine a reasonable time in which to start your investment program. In fact, I think that this is a very good idea.

Remember the Basics
As you enter the world of stock investing using the Reverse Scale Strategy, I wish you the best of results. I could wish you luck, but luck has nothing to do with investing. Once you start applying the principles in this book, you will find that your luck will improve greatly.

If you are ever confused about what to do, reread the sections on Stock Market Myths (Chapter 1) and Investor Mistakes (Chapter 2). Avoid the mistakes and the myths and you will find that you can figure out on your own what to do. The best policy is to understand the principles and trading rules of the Reverse Scale Strategy, not to memorize them. If you let this be your guide, your results will be much better than they would be otherwise.

Five Minute Investing is Copyright © 1995 by Braden Glett,
who has given written consent to distribute on Investopedia.com. Check out Braden Glett's new book - Stock Market Stratagem: Loss Control and Portfolio






comments powered by Disqus
Trading Center