By Tim Leeds
Would you like to make sure the price of the stock you want to buy goes down just before you purchase it?
That's pretty easy to do, actually. All you have to do is convince enough people that it will go down. Since they think it's about to go down, they'll sell. Once enough people sell, the price will go down. Once it starts to go down, more people will sell, and the price will go down even more. Once it's low enough for your tastes, buy.
Of course, you have to walk a fine line. You just might drive your company out of business doing this, then it's hard to make a profit on it.
This might sound kind of silly, but I do have a point to make from it. There has never been a time, including the crash of 1929, when the stock market hasn't recovered from a decline and actually gone higher than it was before the price drop. The only question is how long you have to wait before it comes back up.
I have heard people grumble about their stock prices drop. They always seem to think it's time to sell, unless they've already sold their shares. My advice to them would not involve at what price they should sell. My advice would be "It's a great time to buy -- prices are down."
There are only two ways to lose money in a stock investment. One is to invest in a company that ends up going out of business. The other is to sell at a lower price than you bought it at.
Of course, there's no way to keep a company from going out of business, unless you can buy enough of their product or services to prevent it yourself. What you can do is invest in companies that probably won't go out of business. The surprise closure of IBM or AT&T or Microsoft seems slightly unlikely. While it's possible that it might take a long time to make money on that kind of investment, it probably will profit someday.
When you sell your shares is entirely up to you. If you insist on selling at a lower price, you will lose money. Unfortunately, sometimes money is invested that is needed too soon, and the investor has to pull it out at a lost. That money probably shouldn't have been invested in something as risky as stocks. Even IBM might be down in value if you need to sell your shares before they have time to appreciate in value and give a good return in dividends.
There's nothing wrong with investing some money in stable instruments so you'll have it when you need it. When I worked for Waddell & Reed Financial Services in Missoula, we recommended it. A cash reserve should be in place before you invest in volatile instruments. This is basically what bank interest bearing accounts, money market accounts, and high grade corporate and government bonds are designed for.
Once enough money has been placed in reserve, stocks, mutual funds, and high interest bonds are available to let your money gain a higher return, and work harder for you, as financial advisors might put it.
I have a soft spot for mutual funds, myself. While they might not give as phenomenal a short term return as a stock investment can, they're also not as likely to take a huge short term dip in price, or to go out of business. The amount of money grouped from investors can be spread over so many more investments, the risk is much lower than most individual investments.
Of course, the risk and stability of mutual funds also depends on the fund itself. The risk of the fund depends on what it's invested in, what its goals are, how long it's been in business, and who manages it. (Incidentally, these same principles basically apply to any kind of investment.)
Also, just like any investment, the return is likely to depend on how long the money can stay in the investment. The longer it can sit, appreciate, and be compounded, the more market ups and downs will even out and the higher the average will likely be.