Reducing Stress in Buying Stocks
Apr 28, 2021
By: Frank Kaberna
Buying stocks can create as much internal struggle as purchasing real estate or as little as choosing an outfit for today. The distinction between the two is a matter of expectations.
Passive investors might take their hard-earned money to the stock market a couple of times per year, if that, and even then their zeal can be crushed by a justified line of questioning: Am I buying too high? If I don’t buy today, will I miss out on profits? Will stocks be cheaper tomorrow?
Active traders who engage with financial markets on a more regular basis tend to reduce the weight of these questions because they usually lower expectations from large potential returns over the next several years to small ones in the following few minutes.
The stock market has moved higher by most indices’ measure if the lookback period is long enough. So, when looking at this same lookback period, investing in equities has proved profitable for those who’ve clicked “buy” during this time period. But if you’re still having trouble executing, cost averaging is a solid anxiety-alleviating strategy. Say you wanted to invest $20,000 in the stock market; instead of buying three Small Stocks futures today, an option is buying one today and placing orders for two more at lower prices.
SM75 \ Small Stocks Futures
Source: dxFeed Index Services (https://indexit.dxfeed.com)
More active participants might use advanced statistics to influence their short-term purchases. For instance, stocks tend to rise more often than they fall (53.7% historical likelihood of increase), and they tend to rise with an even higher probability after a day of selling (55.6% historical likelihood of increase after lower close).* This is part of the reason why the “buy the dip” strategy is so popular. In theory, traders could buy SM75 futures after a down day, set strict mechanics for all trades at +/-$25, $50, etc., and realize a long-term profit if this probability plays out.
One tactic isn’t more “correct” than the other, and, actually, many people find that a mix of both can make for a diversified approach. When it comes to buying stocks in whatever term, though, a process that is realistic, calculated, and well-thought-out can help reduce the notion’s stress to that of picking a shirt that matches.
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*Data on S&P 500 Index from 1990 to present
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