secret to buy low and sell high on the stock market

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Avatar for pandoru1997
3 years ago

Today I am going to talk to you about an investment strategy that will allow you to ensure profits of great magnitude without having to worry about what happens in the day-to-day markets.

You may have read or heard about the formula for successful investments: buy low and sell high.

This rule is well known and at first glance it seems very simple. So why are there so many investors who fail to implement it correctly?

The S&P 500 Index has posted gains of 7% on average over the past three decades, but investors like you and me hopefully return 4% annually.

And this speaking of average percentages. Many people recorded losses rather than gains. Some lost all their savings and with it, their retirement plans vanished.

The problem in these cases is timing, that false belief that it is easy to know exactly when to enter and exit the market.

Believe me when I tell you that it is not easy to find that “perfect moment”.

If you invest without a reliable system and a thorough investigation, you are blind in the stock market and that makes you more prone to buy assets at the wrong time and sell too soon.

Lack of strategy also increases the chances that you will make emotional decisions when volatility makes an appearance on the financial scene.

If this happens, you will most likely rush to buy because you are afraid of missing the opportunity to take advantage of an asset's bullish streak and end up paying too much for that position.

Under that same principle, when you see that prices are falling you will feel the need to sell immediately and with it, you would end up accumulating significant losses.

That is why today I want to present you the antidote that will help you avoid falling into bad timing when investing. This formula allows you to ignore sudden fluctuations in the Stock Market and thus make your capital grow over time.

The formula in question is known as dollar-costaveraging (DCA, which could be translated as average cost in dollars). Below I will tell you everything you need to know about it.

The antidote to volatility.

The DCA strategy is simple. It consists of selecting a stock and investing a fixed amount of money in it, in pre-established periods of time.

For example, let's say you decide to buy $ 1,000 worth of Wells Fargo Bank shares per year. Which would be equivalent to USD 100 per week.

It does not matter the exact amount of money that you decide to invest or the frequency that you establish to carry out the purchase operations. The fundamental thing is that this frequency and the amount of money to invest remain fixed, no matter what happens in the market.

What possibly ends up varying is the amount of shares that you can buy with that amount of money, when appropriate according to the plan you set in terms of time.

Along these lines, when the prices of the selected asset rise, you will be able to buy fewer shares and when they fall, you can of course buy more.

In either case, you will be growing your position annually. And if you opt for dividend-paying stocks, the income you receive each year from your investment will also increase.

You can even use that income to buy more shares and boost the play through compound interest.

Over time, your position in the stock will be large enough that the ups and downs you record don't matter much.

In fact, at some point you may be waiting for a setback that allows you to take advantage of the opportunity to buy more shares of the same company at a discount and with it, make your position grow even more.

Best of all, when it is finally time to sell your shares (that is, when you accumulate a real profit on the trade), you may end up with a lot more money thanks to this play than if you had bought a large amount of papers in the first instance or, you would have tried to guess the market timing to disarm your position.

Let's look at a practical example of this.

The magic of DCA strategy.

Let's say in 2008 you decided to apply the DCA strategy with Wells Fargo (WFC) stocks.

In that way, from then on, you committed to investing USD 1,000 in WFC shares every time the market started its first trading round each year, regardless of the behavior of the stock at that time or what happened to the economy.

On the first trading day of 2008, Wells Fargo shares opened at $ 30.48. With your USD 1,000, you bought 32 shares of this bank. Considering that the stock paid a dividend of $ 1.30 that year, you earned a total of $ 41.60 in that time frame.

Then came the financial crisis and Wells Fargo shares began to fall.

Many investors panicked and sold their WFC shares, taking large losses. Others tried to guess when the paper would hit bottom to buy it again.

But that didn't happen to you. Because following your DCA plan, you invested $ 1,000 in more Wells Fargo shares, just as the first trading day of January 2009 began.

The shares were trading below the price you bought the previous year and you were able to use the accumulated dividends to buy the papers. Thus, you added 35 more shares to your position for a total of 67 units.

And even though the company cut its dividend rate that year, you made $ 32.83.

Let's say you stuck to your strategy through January 2020. By now, you would have 396 Wells Fargo shares, which at current paper prices are equal to $ 19,200.

In this scenario, by selling your position you would now accumulate a return of 48% on the USD 13,000 you invested in the company in these years.

And the best part is, you didn't have to worry too much about the financial crisis that started in 2008. And when Wells Fargo was charged with fraud in 2016, you didn't panic either.

Instead, you stayed calm and not only survived the storm, you made a profit.

Now, for the DCA strategy to work, it is important that you respect some specific aspects.

A long-term strategy.

To obtain the best possible results, it is key to choose solid and recognized companies that have a good track record in the business to which they belong and pay dividends.

That way, you can safely wait for your shares to advance over time and your annual dividends to increase as you accumulate more and more shares.

This strategy requires discipline above anything else, as it just won't work if you don't stick with it in the long run.

You can have no doubts about your plan at any time. Build it according to your own rules but make sure you follow them. Do not let yourself be overcome by emotions.

Only two possible scenarios can justify you closing your position early.

The first has to do with changes in the fundamentals of the company. For example, if you suddenly decide to stop paying dividends or start warning investors that you are about to file for bankruptcy.

You cannot make money with a company that is going to cease to exist.

The second scenario is the one where you sell to enjoy your well-deserved earnings.

The important thing is that with a solid DCA strategy you can stop worrying about market swings. Instead, you can focus on strengthening your position, keeping in mind that this will pay off in the future.

I recommend that you do the test.

Good investments! ;) always buy low, don't sell high.

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Avatar for pandoru1997
3 years ago

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Nice article keep it up bro

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