Buy and hold used to be the way to go in the stock market. Buy a good solid stock, hold it for five, ten, even twenty years and you would show a profit. The stock market seemed to go up slowly but steadily. Don't gamble on stock's the gurus said, INVEST in them.
Does the buy and hold stock strategy work in 2008? In fact, has it worked at all in the last ten years or so? Stocks strategies for beginners is one of the most difficult things to get a grasp of. Buying a stock is easy, you just go online, click a few buttons, and you have bought your stock. When you should sell that stock, however, is always the hardest decision.
Stocks seem to fluctuate more now than they did years ago. With the advent of the Internet and day trading, so many dummies and beginners have come into the market who really aren't investors. They are traders trying to make a quick buck and it is almost like they think they are playing a video game. These stock day traders are in and out of stocks so fast it can make your head spin. They are in fact the opposite of the buy and hold investor.
In addition to the online day traders, there have been big events like 9/11, Enron, and other big companies going bankrupt and having shady dealings. These events all work to take down the stock market in days. They undo years of steady progress and in weeks take down the stock market to levels it was years ago.
Buying and holding used to be sound stock investment strategy. You could put your money away in a group of stocks and be reasonably confident you would get back more in many years time. There was no real need to keep up daily with the stock market news because you could feel confident over time your stocks would go up. Is this true today? I think not and this is why it is harder now for beginner stock investors to understand the market and get started investing. The stock market for dummies has gotten more difficult to negotiate the ups and downs.
DOES BUY AND HOLD WORK IN 2008?
HOW TO AVERAGE DOWN FOR DUMMIES
This stock market for dummies lesson is about averaging down.
If a stock you have invested in falls in price you have a few options...
You can panic and sell out, hold onto your investment waiting for the stock to rebound, or buy more stock at the now lower prices. The latter is a strategy known as "Averaging Down" because it will bring the average price of your investment down.
It works like this: you buy 100 shares at $100 a share, the price falls to $80 a share and you then buy another 1000 shares which brings your average cost down to $90.
Is this a good strategy?...
It's a bad strategy if the price has dropped because the fundamentals of the company have changed to a significant degree and the stock is now unattractively priced or it was simply a bad investment in the first place.
But if your initial investment was based on sound research and understanding of the company and the fundamentals of the company haven't significantly changed for the worse then it is the best strategy to take. Because if it was good at $100 it's great at $90.
