Crafting a buying strategy for the stock market is a crucial step for any investor. If you are a beginner or an experienced investor following a buying strategy is as important as choosing the right stock to buy. There is a saying from Warren Buffet that goes “Good business can be a bad investment if you pay too high a price for it”. It’s important to remember that there is no single “best” strategy; the right one for you depends entirely on your personal financial situation, goals, time horizon, and risk tolerance.
Once you narrow down the number of companies to buy, you need a plan for how to put your money into the market. There are 3 different strategies to buy stocks.
1. Dollar-Cost Averaging (DCA)
This is the most disciplined and emotionally detached strategy. You invest a fixed amount of money at regular intervals (e.g., $100 every month), regardless of what the market is doing. You buy automatically, preventing you from trying to “time the market.” When prices are high, your fixed amount buys fewer shares. When prices are low, it buys more shares. This can lower your average cost per share over time.
2. Lump-Sum Investing
This is the opposite of DCA. You invest a large sum of money all at once (e.g., an inheritance or a bonus). Historically, the market trends upward. Therefore, statistically, the best day to invest was yesterday. Getting your money into the market sooner gives it more time to grow. On the other hand if you invest right before a major market downturn, it can be psychologically difficult and lead to significant short-term losses.
3. Buying the Dip
In other words, buying in tranches. This is a more active strategy. Divide your intended investment amount per company into at least 4 tranches. Each time a stock drops significantly or to a support level buy a tranche but make sure the stock is at or below the intrinsic value (fair value) before buying the first tranche.
For example if I want to invest $4,000 in a company, I would buy $1,000 worth of stocks as the first tranche if the company drops to it’s intrinsic value or below the intrinsic value. If the stock drops further to another support level I would buy the second tranche. Once I finish buying $4,000 worth of stock in 4 tranches, I would not buy anymore and continue to hold the stock for a long term. This strategy allows you keep buying the stock at a better price and take the opportunity of a drawdown in the stock without over allocating in one company. This is my preferred strategy of investing.
No matter which strategy you follow the most important part is to be patient. The market will go up and down. Do not panic-sell during downturns and do not FOMO(Fear of Missing Out) buy during peak optimism. Stick to your plan and continue investing your set amount consistently. Over decades, this disciplined approach has proven to be one of the most effective ways to build wealth.
While following a buying strategy it’s also important to build a diversified stock portfolio. Investing in one or two company only can be a terrible mistake. It is not wise to put all the eggs in one basket. Make sure to read Building A Stock Portfolio to learn more about how to properly diversify.
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