Things You'll Need:
- A computer with an internet connection.
- A brokerage account to purchase exchange traded funds (ETF)index funds.
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Step 1
Avoid mistakes. Most mistakes are the result of emotional decision-making (fear of loss, fear of missing out, etc.).
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Step 2
You need to have a grip on three things:
* Your goal and its time frame (longer than five years for a stock investment)
* The direction of the primary trend. (The trend is your friend until the end when it bends.)
* Your emotions. -
Step 3
Understand the ups and downs. The two biggest have been the Nasdaq (mainly technology stocks), up 639.78% from June 24, 1994 to March 10, 2000, and the Home Builders Index (S&P 500 1500 Homebuilder’s Index, symbol XHB), up 839.07% from March 14, 2000 to July 20, 2005.).
In 1994 there wasn't an easy way to buy the Nasdaq, but in March of 1999, the exchange traded fund, symbol QQQQ, began trading. It represented the 100 biggest stocks on the Nasdaq exchange. A 100 share purchase that day would have doubled in value from $5,013 (not including commission) to $11,242 at the top.
Looking in the other direction, if you had bought 100 shares of QQQQ at its low on October 9, 2002, and held it to December 10, 2007, your gain would have been 166.7%. A 100 share investment would have grown from $1,970 to $5,254.
Even if you missed selling at the top by 10% or 12%, you would have still doubled your money. And if you missed buying at the bottom by the same margin, your gain would have been better than 150%. This can be done.
Those who simply held on from March, 1999 to December 10, 2007 gained only 4.8% -- a 0.60% annual average return. You can do better than that.
The gain in homebuilders index was even greater than Nasdaq and in a shorter amount of time. But what were people saying to each other in the summer of 2005? Right: home prices never go down. They were chasing the hot dot, buying houses, and keeping home builders building, with every bit of borrowed money they could find, the triumph of hope (or greed) over reality. -
Step 4
Identify the primary trend. Go to http://www.bigcharts.com or http://moneycentral.msn.com/investor/charts/. Both are free and have a 12-month moving average indicator. Select "maximum time period available" to give yourself the best perspective on the trend and 12-month simple moving average. This doesn't take a lot of time. If you use the monthly moving average you only have to check on the market monthly.
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Step 5
To get the hang of it, type in the symbol "SPY," which is an S&P 500 index fund you can buy, and look at how the slope (the moving average line) is steadily upward beginning in early 2003, despite the price line repeatedly dropping toward the moving average line and then bouncing back up. Those dips are emotional points at which an uninformed investor will sell, afraid of "losing more," and thus missing out on subsequent gains, because most people, after selling, are too proud to admit their mistake and get back into the market.
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Step 6
So the real trick is to put your emotions aside long enough to accept what the chart is telling you. You're not going to "beat the market" with this approach; leave that to the professionals, most of whom fail in that endeavor anyway, but this is an easy way to make your money grow.
