If you’ve been following the stock market for the past week, you’ve surely noticed the turbulence. Otherwise steady companies have seen their valuations oscillate by +2% day over day. For the unprepared investor, these can be spooky times as it all begs the question of whether one should wait for further depressed prices before making a purchase.
Here are three ways you can beat the volatility:
- Keep a Watchlist
- Keep Cash on Hand
- Reinvest Dividends
Table of Contents
Keep a Watchlist
We typically keep a list of around 40 companies that we monitor regularly or semi-regularly. We follow their earnings reports, dividend announcements, and other relevant information to stay abreast of what we need to know to invest.
By staying current on company information year-round, we are able to establish price targets for these companies and simply pull the trigger to buy when the price is right. It saves us from having to scramble in a market downturn to find good opportunities. By having previously established a watchlist, we are able to snag good companies at excellent prices in times such as these.
Remember, falling prices means rising dividend yields. Rejoice in the fact that as the price of your watchlist falls, you are able to buy each dollar of future income for a lower price.
Keep Cash on Hand
If the market is falling and you have no money to invest, it won’t do you a lick of good. Think of a soldier on a battlefield; if the soldier has no ammunition they won’t be much use in a fight and an investor needs cash for the same reason. Cash represents potential. It is the ammunition you need when the time is right.
Opportunities will always present themselves as the market falls in and out of popularity, but some opportunities are greater than others. There is an opportunity cost that poses a real threat to your future prosperity when you lack the funds necessary to capitalize on downturns.
If you worry about spending all of your cash and then seeing the market fall further, you can simply scale into positions a little bit at a time. For instance, rather than buying 200 shares all at once of Company XYZ, it is possible to buy 50 shares at a predetermined price, then 50 more shares $5 lower, and so on and so forth until a full 200 share position is established. That way you don’t burn through all of your funds at once only to see better prices present themselves.
Reinvest Dividends
One of the amazing things about being a dividend growth investor is that even if you happen to not have cash on hand (or if you do but still want to wait), you receive regular inflows of cash which can then be used to fuel your portfolio growth. Dividend reinvestment represents one of the most understated and valuable tenets of stock market investing. By simply passively putting your dividends back into more shares of the quality companies you own, you increase your position without incurring commissions. You also effectively dollar cost average as you are (typically) making these purchases on a quarterly basis.
As your dividends reinvest, you in turn receive more dividends in the future which themselves reinvest into more shares and your passive income begins to snowball. Dividend reinvestment is especially useful when the market is down as you get more bang for your buck.
Conclusion
Even when everyone in the media is crying that the sky is falling and that things are only going to get worse, by staying calm you are able to take advantage of short-term price weakness. To do your best in a soft market, remember to keep a watchlist, keep cash on hand, and reinvest dividends.
Thank you for your interest.
– The Get Rich Brothers
How do you take advantage when stock prices falter?
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