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Market Strategies

May 26, 2012 8:07 PM ET
MitchSand profile picture
MitchSand's Blog
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The best-known market strategy is called buy and hold. Under this plan, you decide which stocks meet your risk criteria and are fundamentally sound, pay an attractive dividend, and are in a sector you believe has exceptional growth potential. You then buy shares of stock, intending to hold them for long term. Properly selected value investments are likely to work best in a buy-and-hold strategy.

A buy and hold strategy may involve purchase of additional shares in the future, reinvestment of dividends, and well-planned diversification to avoid unnecessary market and cyclical risks.

If you combine the standards of value investing with a buy and hold strategy (often thought to e part of the same investment strategy), you will probably seek companies that pay a higher than average dividend, that are leaders in their sectors, and that have at least a 10-year record of exceptional performance under a short list of fundamental indicators.

Buy and hold tends to define an entire portfolio. Investors who are more conservative than average in their approach to portfolio management are likely to also be value investors. If you fit this definition, you probably will find yourself attracted to stocks that have a long history of outperforming not only the market in general, but other companies in their industry. This is one of the attributes of a value investment, and as part of the buy and hold approach, you are likely to be comfortable with the buy and hold approach to an exceptionally well managed, competitive, and adequately capitalized company.


The idea behind diversification is that it does not make sense to place all of your capital in one place. The risk is too great. So you spread risks by selecting different stocks or other products, so that no single economic, cyclical, or market event or news will disrupt your entire portfolio.

The methods of diversification are many. Best known among these is spreading risk by selecting different stocks. As a basic form of diversification, this move makes sense. Owning three stocks with equal dollar values in each, rather than placing all your cash into a single stock, means that a decline in value of any one only affects one-third of the total.

DCA (Dollar Cost Averaging)

Beyond the need to spread risks, additional strategies can be very useful. Among these is dollar cost averaging (DCA), a method of placing a fixed dollar amount into the market periodically. The theory behind DCA is that the averaging effect reduces risk and is beneficial over the long term.

Under this plan, you pay in the same amount each period (monthly, for example). If the price per share rises, you buy fewer shares; if it falls, you buy more shares. So you make three decisions with a DCA plan: the amount you invest, the frequency of transfers, and the overall time period over which the DCA plan will be made.

Ex-Dividend Date Buying

Another strategy involves timing the purchase of stock right before the ex-dividend date. A stockholder has to won the stock prior to the closing of this date in order to earn a quarterly dividend, even though the dividend payment does not occur for up to a month later. So if you buy stock the day after ex-date, you will not earn a dividend until three months later.

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