How to invest $100,000 in Stock – Starting from a large Cash Position


OK, so let’s say old Aunt Lizzie has died (the aunt who you don’t remember seeing since you were five, and just remember that she had a lot of cats) and she has left you $100,000.  You aren’t sure why she left you the money, but now you have a bunch of cash and want to try your hand at investing.

Let’s assume further that you already have an emergency fund (cash) of 3-6 months worth of expenses, a retirement account set up that is full of mutual funds and the like, you don’t have credit card debt, you have the house on a fixed 30 year or — even better –15 year loan, and you have the kid’s college account set up and ready to go.  If any of these are not the case, take care of these first – you aren’t ready to start investing in stocks.

So the question is, how do you invest all of this money, starting from a such a large sum?

Well, if you read any of my recent posts, you’ll know that I don’t think the market is particularly attractive right now, and probably will be heading down for a while.  I could be wrong, however, and all of that federal funds money may finally start the lending flowing and we could see 20,000 on the Dow in a year.  What the market will do over the next few years will also not matter a whole lot in 10-20 years.  There is therefore no reason to wait, but there also is no reason to jump in with both feet.

First of all I would determine how much of the $100k I was wanting to preserve and not put substantially at risk, and how much I was wanting to grow more rapidly with a bit off added risk.  Personally, I might decide that I wanted to preserve $40,000-$50,000 of it through diversification.   (Others who are more risk averse might want to put $70,000-$80,000 in mutual funds.  If you really don’t want to mess around with individual stocks, you would be just fine putting it all into mutual funds.)  This I would put in 2-3 index funds.  Here one might see declines of 20-30% on some years, but this will be rare, and with time this money should grow at an average rate of about 10-15% per year, doubling each 5-7 years.  Here I would put some in now, wait a few months, and put in more, taking about 6 months to a year to become fully invested.

With the rest I’m looking to take a bit more risk for the chance at larger returns through investing in individual stocks.  I know that any one stock could collapse, but it could also grow by thousands of percent.  By buying a few carefully picked stocks I’m hoping to get at least one that grows for years and beats the overall market.

Anytime a large sum is to be invested, even if the market doesn’t look so unstable as it does now, it is always wise to wade in slowly.    I would start by picking 2-3 stocks that have good long-term prospects (see the stock picking category of the blog).  Buy a few hundred shares of each of these — about equal dollar  amounts.  Then watch them for a while, hoping that they will drop a bit and you can buy more shares for a bit less.  Add to positions that do.

Once you have the initial positions, set up, wait about three months.  Check on the positions then and see if the companies still have the fundamentals you thought they did.  If they do, invest more in the 1-2 stocks that have lagged the others – buy low.  Continue to do this, adding a few hundred shares every three months, until you have about 500-1000 shares of each.  You may have $30-$80,000 of the money invested by this time, with $10-$30k in each stock.  If this is too much for you to lose, choose six stocks instead, making each position $5-$15k.  If this is still too rich, choose 10.   If you are still too worried, individual stock investing is not for you.  Buy three or four nice ETFs or index mutual funds and sleep easy at night.

At this point, start to look for another good stock in which to invest the remaining funds if money remains.  As the positions grow, sell off some shares if any of the positions become too big for you to lose – bad things happen some times.  Put some of this money in other individual stocks or add to existing position.  Diversify the rest to preserve the capital you’ve gained.  If any of the companies lose the qualities for which you bought them, sell them off and put the money into something else.  Also, see if you can save some money from your occupation and continue to add stocks to your portfolio.

Hopefully Aunt Lizzie’s gift will lead to a large portfolio of stocks and be worth many times the original gift 20 years into the future.  If this happens, maybe take $100,000 and give it to a grandchild.  Put it in an index fund or ETF when they are twenty and you will have paid for their retirement.  Do it when they are two, and you will have created a multi-millionaire.

Did you find this info useful?  Refer a friend: https://smallivy.wordpress.com

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Cyclical Stocks – Semiconductors and Airlines (This Stock Goes to 11)


Today’s post is not for the serious investor, but instead for the hobbyist who likes the thrill of playing the market and paying brokerage fees.  the serious investor who is looking to hold stocks for long periods of time and make serious profits may find the post of interest as well because it shows the kind of stock to avoid because it will never make money long-term.  That is the cyclical stock.

Examples of cyclical stocks are semiconductor companies and airlines.  Neither of these business create the desired steady, long-term price appreciation desired.  Instead, they tend to experience regular cycles of boom and bust.  While some of the booms are larger than others, the price eventually always busts and the stock falls back down.

For semiconductors, this is because there is a sweet spot in the life of a new chip where they are selling a lot and therefore making a good profit.  In this part of the cycle the company ramps up production, opening lots of fabrication plants.  Eventually, however, foreign competitors start to flood the market with chips, causing the price to fall and the company to shutter factories and pay the associated costs. The stock price then falls back down and somehow the amount of money the company actually has in the bank is about where it was when they started.  This repeats as new newer, faster chip is created and reaches the sweet spot on price.

I have owned Cypress semiconductor several times in my life and made money each time.  I learned early on that the price would periodically take off and then fall.  See the long-term price chart and you’ll see what I mean:

http://finance.yahoo.com/q/bc?s=CY&t=my&l=on&z=m&q=l&c=

A friend and I used to joke that the stock always went to 11, so if it was below 11, buy, if it was substantially above 11, sell.  Any price between 10 and 20 really could have been picked and this philosophy successfully applied, but 11 was a humorous value as devotees to Spinal Tap will attest.  Substantial money can be made with this type of stock by figuring out what is “low” and what is “high” and then just waiting for the price to fall within the desired ranges and act accordingly.  The trick is to avoid the temptation to think that “this time is different” and hold too long or buy too high. 

Note that the closer you set the values together the more often you will be in and out for the stock, but the returns, strangely enough, will be about the same if brokerage fees and taxes are ignored.  It makes sense therefore to set the limits fairly far apart so the stock is not traded too often. 

Cypress CEO TJ Rogers actually did an analysis of trading Cypress based on Price to sales ratio.  This study is available from their website and is well worth reading:  http://www.cypress.com/?rID=34959

Did you find this info useful?  Refer a friend: https://smallivy.wordpress.com 

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

We’re near a Bear Market – Market Commentary for May 26th


In the last post, I provided the correct definition of a Bear Market.  As I said, it has nothing to do with price, it has to do with the long-term trend of the market being in a down-trend, as opposed to an uptrend, which would be a bull market.  And to follow Dow Theory, the “market” is judged by the Dow Jones Industrials and the Dow Jones Transportations.  The charts for both can be found at the following links, thanks to Yahoo:

Industrials:  http://finance.yahoo.com/q/bc?s=%5EDJI&t=1y&l=on&z=m&q=c&c=

Transports: http://finance.yahoo.com/q/bc?s=%5EDJT&t=1y&l=on&z=m&q=c&c=

You’ll note that the DJIA is started a down-trend — it had a low that was below the last low and a high that was below the last high.  The Transportations, however, have only had a lower low — the index has not moved up again.  We therefore may be on the verge of a bear market.  Being more cynical, looking at the longer-term 5-year chart for the DJIA:

http://finance.yahoo.com/q/bc?s=%5EDJI&t=5y&l=on&z=m&q=c&c=

you’ll notice that we haven’t yet gotten back up to the high reached back in 2008.  This may suggest that we never emerged from the Bear Market that started back then, and the rally we saw was just a long and substantial bear market rally.  Looking at the fundamentals, the debt crisis in Europe is certainly not good news for the market that thought it was finally going to see earnings rise out of the hole left by the housing collapse.

On the other side of the coin, however, the very, very low interest rates that the Fed has created must have an effect eventually, either causing growth or inflation.  If the former occurs, the market may rally, debt crisis or no debt crisis.

What this all means is that we may be ready to see another retreat by the markets, possibly testing the lows set in 2009.  While this might seem disheartening (no one likes to see the value of their investments go down), it actually presents a great buying opportunity for those with a long-term investment horizon.  You see, when the market retreats, it takes all stocks, good and bad, down with it.  This means that some great companies that have nothing wrong with them may be at fire sale prices soon. 

So here’s what to do.  If you have a long-term horizon (10, 20, 30 years) continue to invest regularly in case the market decides to rally and leave this bear market, but be a little picky about the prices you pay.  If a stock seems a little pricey, maybe buy a little but keep some cash in reserve.  Also, if you have a stock or two that has done well but has started to lose some of its luster, sell a bit and build some cash so you can take advantage of opportunities that may present themselves.

If you do not have a long-term horizon, for example, you are looking to retire in the next five years, build up enough cash to get you through the next 5-10 years in case the market decides to go down for a bit.  You should also be shifting money from growth stocks to dividend paying stocks, bonds, and REITs – you actually should have been doing this for a while.  It is always a good idea to keep cash in reserve that you will need in the near-term because it is difficult to judge anything about the market during short periods.  Don’t take big risks with market volatility when you don’t have time to wait things out.  But if you have the time, take advantage of the drops and don’t worry too much about the fluctuations.

Did you find this info useful?  Refer a friend: https://smallivy.wordpress.com 

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security.  Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.