What is the best way to begin accumulating a new security? There are probably as many approaches as there are investors. I have seen where some people jump in and immediately purchase the entire block needed to complete their asset allocation. While others use a more gentle approach of buying-in at predetermined amount and time. As an example, I have seen where some will buy 1/3 of the desired weightings every four months, so that they are fully invested in one year.
The approach I take is less mechanical. As noted in some past articles (Dynamic Dividend Investing, It Was An Odd Odyssey, Is It Time To Upgrade Your Portfolio?, etc.), I like to initiate a small position in a company (or fund) to get to know it better - kind of like dating before marriage. By having a stake in the company, this forces me to get to know the investment, its management and its behavior in the market. If I like what I see, I usually purchase another small block; otherwise, I end the relationship. Over time, this dating process can lead to full commitment (marriage) where the investment is an integral part of my portfolio.
In most instances, I will wait at least three months between purchases of additional shares. In addition to learning more about the company, waiting three months allows time to see the next dividend declaration. Usually between nine months and a year, I determine if this is a company I want to make a long-term commitment to. Once I make that determination, I aggressively increase its allocation to my desired allocation level.
How do you initiate a position in a stock?
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Posted by D4L | Thursday, February 21, 2008 | commentary, process | 4 comments »________________________________________________________________
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When I first began investing I used to do my analysis and then buy 100% of my desired position. Now that I’m a little more seasoned I take a more cautious approach. I usually initiate a half position and then keep a close eye on the security over the next 2 -6 months. After the 2-6 month holding period if the security has grown close to my desired weighting I’ll do nothing. However, if it has stayed stagnant or declined significantly I will average down with either another half position or a quarter position.
American Dividend Investor
I learnt my lesson hard way. Now I have more analytical approach. I initiate my position with 50% of my goal. Follow it on quarterly-basis. If equity increases, i am happy and stop at that. Then I look for another similar equity for remaining half. If reduces by 20% (analyze taking in account the time duration, qualitative issues, div, etc) then add remaining 50%. When ROE drops more than 40-50% in short time or some other valid reason, then it was a mistake to begin with. Get out of it.
American Dividend Investor and Passive Income: I have never liked opening with a large position. In many instances I have had the opportunity to purchase additional shares at a lower price after my initial purchase.
Best Wishes,
D4L
Good tip for a young investor (like myself). Thanks!!