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How to Tame the Fierceful Stock Market ?

By: John Kiing


If a man has learned that average results on common stock are better than on fixed-dollar investments, but he fears that exposing himself to the excitement of the wild stock market will cause him to act unwisely. How can he gain the advantages of owning stock without running too much risk?
Expert Advice. The first step is to realize that intelligent selection of stock is a business in itself, requiring considerable information and experience. An ordinary investor needs expert assistance, which he can obtain either in the form of advice or in letting an expert manage his money. An adviser can be an individual or a big corporation operating nationally, or something in between those extremes. Where an investor can locate an adviser in whom he has full and lasting confidence, and whose fees he is willing to pay, this reduces the emotional problem.
Mutual Funds. One consideration for a cautious investor is to buy shares in one or more stock mutual funds. To be sure, this requires some study, but the sensible selection of a mutual fund is a simple matter compared to trying to choose among all the large number and variety of corporate stock available.
For a nervous skeptic, a major advantage of a mutual fund is that it publishes tables showing exactly what net results have been obtained by people who bought its shares on past dates. Of course, the future is not guaranteed, but a fund's past performance record furnishes a solid starting point for a restless heart.
Diversification and Volatility. In choosing among mutual funds, a temperamental buyer might pay extra attention to the following points:
(1)  How much diversification? The advantage of diversification is that results cannot be much hurt by a bad performance on the part of a few of the stocks owned. Most mutual funds spread their assets among at least fifty companies and a dozen industries, more than is practical for an investor acting independently, unless he is wealthy. With broad diversification, a fund's past performance is a better guide to the future; because the fund has always owned a good many stocks, a good performance record cannot be the result of a lucky choice of just a few stocks.
(2)  How much volatility? Judging by the record to date, the market price of common stock will rise and fall, and a nervous investor might as well get set for this. Diversification helps, but it by no means eliminates price fluctuation.
Bonds and Stocks Split Portfolio. A "balanced" mutual fund divides its assets among bonds or preferred stocks, or both, as well as common stocks. Naturally its market value per share fluctuates less than that of a fund wholly invested in common stocks. Also, the type of common stocks owned by a fund affects its volatility. So if a man gets panicky when the price of his stock drops, he had better look for a balanced fund whose record shows a comparatively stable price trend.
Lower Mental Strain with Small-Move Units. Many investors seem to assume that the only proper way to buy or sell stock is to move a lot of capital at one time. When a family buys a house, they must buy the whole building and the land, in one deal. But in the stock market, the minimum unit can have a pretty small dollar value. An investor's mental strain in deciding to buy or sell stock is greatly reduced when he limits each action to a small portion of his capital. Most mutual funds offer standard plans for small installments in both buying and selling.
Dollar-cost Averaging. Many investors also try to be smart in the timing of their buying and selling of stock. This involves forecasting when prices will rise and fall and is recommended to any investor anxious to develop stomach ulcers. A less exciting way to buy stock is to adopt dollar-cost averaging. When a man puts in a similar amount of savings, once each three months or more often, regardless of the current price, he is almost sure to end up with a fair average cost per share. When a man wants to sell stock, he can use the same idea.
Fixed-dollar Reserve Balance. Keeping some capital in fixed-dollar items rather than putting it all into common stock is a good idea for other reasons besides reducing nervous tension. When a man must sell some capital to raise extra cash and the price of stock happens to be down, then it is nice to have some bank deposits or similar investments with fixed value. For more precision, an investor can adopt a standard ratio between the current market value of his stock and his fixed-dollar or reserve capital.
Don’t Borrow to Buy Stocks. Borrowing money is usually necessary for a family when buying a house, and it may be wise, because in repaying a mortgage the family can probably meet the moderate monthly payments without undue strain. But in buying common stock, whose value is apt to fluctuate, an emotional man who borrows money in order to buy is just plain crazy.
Calm Down your Wife. A wife's nerves are often forgotten when a man is selecting investments. Does she understand his plan, so that when he dies she will know what to do? Especially for an elderly man, a sensible rule might be that he owns no investments that will worry his widow.
Practicing most of the methods given above would help an investor sleep more soundly at night!

Article Source: http://ezine-articles-planet.com

John Kiing is a stock investor in U.S and Asian stock markets. He writes for 101StockInvestments.com - a FREE resource center for novice or seasoned market investors. This article could be distributed digitally as long as the website links remain intact.

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