Ask the Fool: The Best Time To Buy?
Q. If I want to invest in some stocks, is there a best day or week or month in which to buy them? — H.Y., Norwalk, Connecticut
A. That’s a market-timing mindset, which won’t serve you well.
For better results, go about it this way: Whenever you’re ready, you might just start investing regular amounts into a low-fee, broad-market index fund, such as one that tracks the S&P 500. Don’t worry about what the market is doing — just keep investing, preferably for many years.
If you want more control over things and want to aim for above-average returns, learn how to study and evaluate companies and their stocks, and aim to buy into healthy and growing businesses when their shares seem undervalued or reasonably valued. (Undervalued shares offer you a margin of safety.) Then plan to hang on for years, as long as they still have promising growth prospects. Whenever you find a great company selling at a good or great price, that’s the best time to buy.
And by the way, when the overall stock market has dropped sharply, as it has recently done, it will be much easier to find tantalizing bargains.
Q. What are “balanced” mutual funds? — T.S., Elyria, Ohio
A. Many mutual funds invest mostly in stocks, and other mutual funds focus mostly on bonds. Balanced mutual funds, sometimes called multi-asset or mixed-asset funds, offer a mix of both stocks and bonds, split according to a specific allocation.
These funds, therefore, can be a bit more stable than single-focus funds; ideally, they deliver both income (from bond interest and some stock dividends) and growth (from stocks). Many fund families offer balanced funds, with varying asset mixes.
Fool’s School: How Stocks Are Made
Most shares of stock that you buy have arrived at the stock market via the initial public offering (IPO) process. (Other ways include direct offerings and SPACs, or special purpose acquisition companies.)
Here’s a simplified IPO example: Imagine Scruffy’s Chicken Shack is a smallish but growing private company. It wants to grow faster, though, which means it needs to hire more workers, build more shacks and plow money into marketing. All that requires more money than it has on hand.
There are several ways that Scruffy’s can get more cash. It might borrow money from a bank. It might issue bonds, promising to repay bondholders with interest. It might find some wealthy people or businesses that are willing to invest in it. Or it might “go public,” usually by issuing shares that will trade on the market via an IPO.
The IPO process typically requires the hiring of one or more investment banks, which underwrite stock and bond offerings. The bankers will study Scruffy’s business. If they estimate that the company is worth, say, around $500 million, they might recommend (based on the company’s needs) that it sell 20% of its business as stock, issuing 4 million shares priced at $25 per share to raise $100 million.
After the announcement that Scruffy’s is going public, if there’s great interest, the bank might hike the opening price. A lack of interest could cause the price to be lowered — or Scruffy’s might even decide to postpone or cancel the offering.
The investment bank will typically keep about 7% for its services, with Scruffy’s getting the rest of the proceeds from the IPO. After this point, investors will buy and sell Scruffy’s Chicken Shack (ticker: BUKBUK) shares from one another on the open market, typically through brokerages.
Scruffy’s won’t get any more proceeds from those 4 million shares — it got its money when it issued them.
Once it’s a public company, Scruffy’s will have to file earnings results and financial statements quarterly with the Securities and Exchange Commission (SEC) and have its reports regularly audited.
My Dumbest Investment: My Top Three Blunders
I have three top blunders: I bought shares of General Electric at $39.75 per share, and dollar-cost averaged down to a $60,000-plus loss. I sold 1,550 shares of Microsoft at $35 apiece — they’re now at $266. I bought into Amazon.com at $306 per share and sold at $550 because you shouldn’t be able to make money this fast.
I’ve made a new rule for myself: If a stock falls 20%, I sell. If it rises 100%, I sell half and let the rest ride. — R.Z., online
The Fool responds: Your new rule can save you from losing large sums — but it might limit your gains, too. Many great stocks have fallen much more than 20%, only to rebound later and keep growing. Shares of Starbucks, for example, dropped by more than 80% between 2006 and 2008, to the single digits (on a split-adjusted basis). They were recently at $79 per share — and that’s after a 37% drop from their high last summer.
Consider making your new rule a bit less rigid. If a stock falls by 20%, dig into why it has fallen. If the company is still healthy and performing well, consider hanging on. If you’ve lost faith in it, sell. If an investment doubles and you expect further growth, consider selling a small portion of it — or, if you’re shooting for maximum gains, none at all.
At a minimum, do some research and thinking before acting on your rule.
– distributed by Andrews McMeel Syndication
