There are two types of investors. One type chooses an easy way of investing, the second type is more adventurous. Both approaches are legit and investors choose them according to their style, personality and time they are willing to dedicate to their portfolio.
The first type of investors contribute to their account regularly and invest on a regular basis without checking where their stocks are and what the stocks are doing. They cost average their investments. When the stocks are higher, they purchase less shares and when the stocks are lower they purchase more shares.
It is a similar approach to most investors do in their 401k accounts.
And it is a valid approach if you do not have time or do not want to commit more time to watch your stocks. It is also the most passive approach of investing on your own into individual stocks. It goes very well with dividend growth stocks as they also provide you with a bare bone passive income. What an excellent strategy it is! You have a passive investing style generating you a passive income. You do not have to move a finger to collect income in form of dividends and you do not have to move a finger to contribute new cash to your account (assuming you set up an automatic money transfer from your checking account to your broker account).
And add to it DRIPping and you have an ultimate money machine!
Timing the stock
The second approach generates a passive income too, but its creation is not as passive as the first type. It is for investors who choose to be adventurous, have enough time to dedicate to their portfolio and actually like it and want to be as active as possible.
I belong to this category of investors as I love to watch my stocks and positions on daily basis and I like to time the market.
Did I say time the market? Yes, I did. Many investors and passive investors will tell you that timing the market is suckers game. Hello Suckers! It doesn’t have to be, if you do it the proper way.
So how do you time the market so you do not lose money?
I actually do not time the market, but time the stock itself. And as a dividend investor I do not time it the way most people out there understand it. I do not time the stock to buy low and sell high.
I time the stock to get the best entry price possible.
Recently on Seeking Alpha I read a post about Realty Income (O). A few investors or contributors posted their comment that they are actively trading this stock. They buy it when it corrects to its 30ies, and short it when it hits a 45-ish level and some posted that this is a sucker’s game.
And that made me think that I actually have a similar approach. But there are differences to it. As a dividend investor, I never sell my dividend stocks (except there is a reason for it such as a dividend cut).
But I time the stock, when I want to buy it. I contribute money into my account and wait for the stock to go down in price. If all my stocks are growing I do nothing and raise the cash. Once a stock (any of the dividend stocks I watch) starts falling I check first why (dividend cut or a market frenzy?) and if it is due to overreaction or any short term nonsense, I start watching such stock closely. When it falls well enough I place a trailing limit order, or contingency order which trails the price of the stock down.
As long as the stock falls, the trailing order trails the price down. As soon as the stock reverses and it hits the trigger price it activates a limit order. Once the limit is met, I buy the stock.
So, I time the market this way. I get the best price ever, although it is not a 100% sure thing. Sometimes the stock reverses hit my limit, an order gets executed, and then the stock turns back down and continues in its downfall.
If that happens I have a second set of cash ready for more shares to buy (that’s why I never use everything I have in my account, but try to split the cash in three thirds and use the thirds only.
When the markets and stocks I bought this way start rising and continue rising, I just sit tight contribute more cash, and collect dividends.
Which approach do you personally favor?