Reader Question

Someone left a good question on yesterday's Very Simple article on the Blogger version of this blog. Here's the question and my answer below:

What type of buying strategy do you recomend to implement a portfolio with a set amount of money? Do you look at long term charts? For example EEM is up over 24%, do you wait for a pull back and risk being left behind with cash?

The question is straightforward but I'm not sure the answer can be. Something that I try to follow is I care more where they are going than where they have been. It is possible I made up the saying but not the sentiment. I know too many people that care more about where a stock has been than where it is going. I have family members that still own things like Sun Micro because it was at $50 once. No joke. Do you know anyone like that?

That diverges from the question a little, sorry. My limited thinking process tells me there are two ways to implement a new portfolio. All in at once or go in with some sort of methodical pace over some time period. Neither one is right, neither one is wrong. If I implement a new account today all at once and tomorrow Osama gets captured the client wins big time. If I implement all at once today and tomorrow we have something worse than 9/11 the client loses. There is no way to know. There are studies that show there is no way to consistently win that game.

The way I usually implement a portfolio is go in about 50% right away, wait a week for another 25% and then try to finish when the market has a bad day. I finished implementing a few accounts late last week. Sometimes the strategy looks smart and sometimes dumb, that's just how it goes.

For the portfolio I talked about yesterday I would probably go all in at once unless the tech stock I wanted had just had a monster rally. In that case I would let that one trade sideways for a few days or pick another one.

Where ETFs are concerned I think waiting becomes less important, especially if it is long term money. Investor demand can't push an ETF higher in the same way a stock responds to demand. If there is a flood of demand for an ETF they create more shares so the tracking error doesn't get out of whack. (I realize this is a simplification of the ETF creation process).

Hope that helps.

Keep the questions coming and I'll try to answer them.