The previous article discussed the 1 gamble that is worth taking by investing in the stock market at these times. Based on history, the odds are in our favor. Sooner or later sentiment will change and the economy will stabilize. The stock market anticipates the future economic state months in advance. Sometimes the economy is not as good?? or not as bad as it looks as weve seen so far in 2010.
I simply cannot buy the doom and gloom out there about a global economic meltdown. In any case if it ever hits, we do not know how bad the consequence could be. That is why I believe a lot of effort will be put in to avert such a disaster before it happens as the social consequences would be dire.
The Risks
In terms of risk, asides from those associated with investing in individual stocks, I will be using a home equity line of credit since my investment account is already fully deployed. The interest associated to this HELOC is 2.5% and I would be willing to use up to 20k-25k. In the event where this portfolio goes to 0$ for whatever reason, the impact would be delaying my mortgage pay off by 1 year.
Since the recovery is fragile and will be taking time to consolidate as it seems, I am presuming that the Bank of Canada will not be moving interest rates at least for the rest of the year and possibly in the next 12 months. It will take a while before rates start moving up aggressively in my opinion which is excellent since the cost of borrowing will be cheap for this period.
The Plan
A plan is always required in order to avoid emotions. In fact, before putting any money into this market, the fear factor has to be neutralized. Neutralizing fear starts by identifying the risks like I did in the previous paragraph and identifying the proper companies to invest in.
Historically, we always recovered from recessions and the market resumed its growth. However, we do not know how long it will be before the market recovers, it could be months or years. This variable is covered by buying into dividend paying stocks for 2 reasons:
- Receive income while I wait.
- Cover the interest rate from dividends instead of using my principle.
The plan is to enter the market in small quantities in order to avoid timing the market and missing lower prices. Since I do not believe in timing the market, the buying will be spread across this summer which on top of being known as a dull period, the market is sitting at yearly lows since it is reflecting global economic worries.
It is very important to remember that the investment time frame is not in days or weeks, this portfolio will be a long term hold. The next post will cover which stocks I am looking at and why.
What is your opinion regarding my plan so far?
6 comments to Stock Market Gambling: The Plan to Profit?
Thank you for your feedback Kevin,
I agree with you that to believe otherwise is to believe in the end of times. So this is what i consider the gamble element in my investment. The remaining risks are inherent to stocks just like we have inherent risks when we take a walk down the street.
Discipline is key to succeed because I will be buying in a sea of red and fear of a double dip recession. However, in 3-5 years I might look back with a big smile!
Interesting. I did something similar when I was young. I put $18,000 on the line in a single stock and reasoned that if I lost it it really wouldnt make a difference in my standard of living but if I doubled or tripled it it would make a difference. It worked out but still today Im much more conservative and I cringe a bit at your plan.
I like that you have a plan and that you have laid out the pros and cons. Dividend stocks at todays rates make a world of sense compared to the home equity credit rate. There is of course always the possibility of running into a Bank of America!
Realize that from the beginning it can be a negative if it works in your favor because some people would up the ante. Sometimes thats the biggest danger. Ive seen people sell options, do carry trades, buy private placement cmos all thinking that they had found an easy way to print money. You start to sucked in if you start to think its easy.
Good luck Ill be rooting for you.
DIY, I appreciate your feedback,
You are spot on when you talk about upping the ante. In fact what scares me is my own self more than the market. This is why I am establishing a framework to limit my human natures influence.
Finding it easy is equivalent to underestimating the enemy. Deploying these funds is like deploying your battalions to a front line, you do your best to come out with the most gains and not the contrary. In this analogy your troops are not there to kill but to assimilate and bring over new friends.
Thanks for the rooting!
It will take a while before rates start moving up aggressively in my opinion which is excellent since the cost of borrowing will be cheap for this period.
Im with you on this one, though there could always be an unexpected turn of events.
Fear often comes from a sense of the unknown, and this scares us when we dont have any contingency factors in place. Therefore, a plan is important to have. If X happens, then I will do Y. If Z happens, then I will stay the course. etc.
There are some serious reasons why this recession/depression is like no other, and I recommend reading more on Austrian economics to see why. That said, people still invent, innovate, and produce, and things eventually do recover. To believe otherwise is to believe in the end of times, and whether its true or not changes nothing because youre screwed, anyways. Therefore, Pascals wager is a good analogy for this sort of situation.
You just need to ask yourself, Is my plan based on sound economic fundamentals? How will my plan be affected if X, Y, or Z happen? What is my upside risk? What is my downside risk?. Once you have that in place, then you can make an educated decision. In the end, economics is all about educated decisions. Sometimes we win, sometimes we lose, but the difference is in the discipline we maintain and avoiding simple mistakes like buying high and selling low.
Good luck, Mich!