YourCreditCompany.com Official Blog

As ordinary non-expert investors, we seem to have been convinced that playing prevent defense is a wise strategy to “limit our down-side” risk exposure.  In other words, since we don’t have the slightest idea or clue about what we’re doing and “it’s only our entire financial life at stake”, we best hit singles, bunt, or punt. Right?Wrong!  Let’s first establish some terminology.  Diversifying (for investments) means that you should spread around your dollars; you know put your eggs in many baskets to limit your losses (and by definition, limit your gains!).  DCA is dollar cost averaging, the system whereby the investor places a specific amount, say $500 into a specific stock, and say IBM common shares at a specific time frame; say over a 10 month period; $500 per month or $5,000 total capital.Okay, let’s first look at the multiplier power of DCA.  If you’re worried about finding the highs, lows or mid-points for a certain market or stock, DCA completely removes the guess-work.  What you’re doing is literally blindly shelling out $500 on the 15^th (pick any day you like) of every month come hell or high water; no matter what you stock or the market is doing.Think of yourself as a pre-wired robot because that’s exactly what you need to be for the DCA platform to work.  So then, what does that math look like?  Well if the price of IBM starts at $100 per share on deposit 1, but drops to $90/share (10%) on deposit 2, you automatically acquire 10% more shares for the same $500.  If the price goes up to $110, you get 10% less and so on.With DCA and a good, solid upwardly long-term growth stock like IBM, you make down-ticks in price a buying opportunity, not a reason to sell or even fret about your values going south.  Bottom line, if IBM’s a stock love for at least one year, there is no better way to buy it.  While you’re at it utilize the next best thing too; MARGIN.  Leverage your winnings by broker loans and cover any potential margin call with a limit down sell order which the broker will likely require anyway.Diversification; long thought to make a portfolio safer is, we believe a technique which is far overrated.  So much so that the “Intelligent Investor” segment of the Sat/Sun WSJ wrote the latest in modern theory questioning the veracity of “more is better”.  Jason Zweig, the writer hedged his bet somewhat but still did a good job of bringing theory to common reality.  His headline “More Stocks May Not Make a Portfolio Safer” tells only half the story.“As many studies have shown, at least 40% of the variability in return can be reduced by moving from a single company to 20.  “…something entirely different happens when flesh and blood humans try to pile up stocks one at a time”.  In fact, for any given average investor, the averages or diversification safety really doesn’t apply.We take it a step further.  Since humans can’t think randomly, where is it written that a basket of “great” is worth the trade off of losers?  Are we making our point? What if Aunt Trudy used 25% of her $10,000 to buy Microsoft back in 1982 instead of only 5%?  Gur Huberman, a finance director at Columbia University points out that “investors tilt toward stocks that match their own beliefs about risk”.  If Microsoft’s your pick in the early 80s, you’re a certification genius.  But if you picked Motorola in the 90s you’re a bum; get our drift?Why not try this.  Take your $10,000; buy 2 stocks that you love for $5,000 total.  Then buy 5 more stocks for $500 each and with the last $2,500 buy a stock market index fund.  Want a little more risk/reward?  Use margin.  Then this way you are getting the best of all worlds.Your Credit Company