Author Topic: Beginner investing questions  (Read 5133 times)

postvmvs

  • 5 O'Clock Shadow
  • *
  • Posts: 45
  • Location: NJ
Beginner investing questions
« on: May 08, 2015, 07:59:02 AM »
Some beginning investing questions.

If one wanted to buy an ETF such as VTI, one can do it any point during the day. A quick look at a chart of recent behavior shows it swinging up and down pretty regularly. It would make sense to me to buy it with a limit order when it is in one of its lower swings. Looking at the chart and the up and down swings in a short time frame are easy to estimate. The only risk is mis-estimating and "never" buying because it has moved up "permanently". Is this just so obvious that "everyone" does this already?

With dividend paying stocks, the date and amount of dividend payment is published knowledge and readily available. What is to stop someone from buying a lot of a stock right before the dividend is paid and selling it soon after. Other than the brokerage fee to trade and bid-ask spread, am I missing anything?

dandarc

  • Magnum Stache
  • ******
  • Posts: 4473
  • Age: 38
Re: Beginner investing questions
« Reply #1 on: May 08, 2015, 08:07:03 AM »
If you're holding for the long-term, intra-day variation doesn't really matter.

There is nothing to stop you from making that move in regards to dividends, other than the price of the stock will drop by the dividend amount once it goes ex-dividend and you can sell.  So it would basically be a wash - receive dividend of $XXX, but lose $XXX in share value.  This can be hard to see at times in a basic chart because all the other things that affect stock price are going on at the same time, but that is what happens.

anks

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Beginner investing questions
« Reply #2 on: May 08, 2015, 08:12:37 AM »
Small swings on a day to day basis are small potatoes in comparison to the change in value over the long run. Just hit the buy button on a regular basis and forget about it. Remember, the market always goes up!

When a company pays out dividends, stock price adjust accordingly to offset the money leaving the company's bank account. If they give out a $1 dividend, expect the share price do go down $1. You will not gain any money with this strategy.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: Beginner investing questions
« Reply #3 on: May 08, 2015, 10:49:12 AM »
Some beginning investing questions.

If one wanted to buy an ETF such as VTI, one can do it any point during the day. A quick look at a chart of recent behavior shows it swinging up and down pretty regularly. It would make sense to me to buy it with a limit order when it is in one of its lower swings. Looking at the chart and the up and down swings in a short time frame are easy to estimate. The only risk is mis-estimating and "never" buying because it has moved up "permanently". Is this just so obvious that "everyone" does this already?

With dividend paying stocks, the date and amount of dividend payment is published knowledge and readily available. What is to stop someone from buying a lot of a stock right before the dividend is paid and selling it soon after. Other than the brokerage fee to trade and bid-ask spread, am I missing anything?

What you're describing is called Market Timing, and it's one of the worst investor fallacies currently known.  It's good to ask questions, especially when you feel you're "missing something".

I recommend watching the short Boglehead Video Series:

http://www.bogleheads.org/wiki/Video:Bogleheads%C2%AE_investment_philosophy

Yes the guy is silly, and a bit over the top, but the advice is geared towards newbies and it's easy to understand.  Video #5 directly applies to your question:

------------------------
Never try to time the market (Rule #5)

The vast majority of investors earn less than the market due to two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.

https://www.youtube.com/watch?v=b3pnpbWYfwc&list=PL21534875BFC50EEE&index=7

SuperSecretName

  • Bristles
  • ***
  • Posts: 353
Re: Beginner investing questions
« Reply #4 on: May 08, 2015, 11:14:23 AM »
When buying ETF, yes, I try to capture a good intra-day price.

Is it fun?  sure is, and makes me feel slightly better momentarily.

will it matter long term?  Absolutely not.

Just make sure to pull the trigger by the end of the day and not wait beyond that to buy-in. 

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1726
  • Age: 48
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Beginner investing questions
« Reply #5 on: May 08, 2015, 03:15:44 PM »


With dividend paying stocks, the date and amount of dividend payment is published knowledge and readily available. What is to stop someone from buying a lot of a stock right before the dividend is paid and selling it soon after. Other than the brokerage fee to trade and bid-ask spread, am I missing anything?

That is called "dividend capture".  Theoretically, it doesn't work because the price of the security should rise close to the x-div date to match the premium.  In practice, my physician was telling me he tries div/cap often and does pretty well with it.  I think it can be a risky strategy if the underlying company is not solid.  You could find yourself holding the bag.

postvmvs

  • 5 O'Clock Shadow
  • *
  • Posts: 45
  • Location: NJ
Re: Beginner investing questions
« Reply #6 on: May 11, 2015, 07:21:14 PM »
Thanks for the responses. I did learn a bit more.

I moved an old IRA to Vanguard and am in the process of turning the resulting 'cash' lump into a sound asset allocation, but I don't won't to pull the trigger to buy everything all at once. Trying to spread out the buying, it certainly makes sense to me to try to catch the lower swings of the natural gyrations in price. If I were buying a small amount at a regular interval, I can see how it would not matter.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5998
  • Age: 36
  • Location: Seattle, WA
    • My blog
Re: Beginner investing questions
« Reply #7 on: May 11, 2015, 07:48:46 PM »
I moved an old IRA to Vanguard and am in the process of turning the resulting 'cash' lump into a sound asset allocation, but I don't won't to pull the trigger to buy everything all at once. Trying to spread out the buying, it certainly makes sense to me to try to catch the lower swings of the natural gyrations in price. If I were buying a small amount at a regular interval, I can see how it would not matter.

This process of investing a lump sum of cash gradually over time is called "dollar-cost averaging." In general this will be a worse decision than simply investing the lump sum all at once. As you say, it sounds nice to be able to invest some when the market goes down and know that you got a better deal on some of your shares. However the market goes up on an average day, so it's more likely that you'll pay a higher price than a lower price.

It's always possible that today will be the highest day for the rest of the year and it's all downhill from here, but nobody has a crystal ball. You have to play the odds. By buying now you're betting that the market will go up between now and whenever you might otherwise invest. By buying later you're betting that the market will go down between now and then. The market goes up more often than it goes down, so the best bet is to invest it all now. But if you're too scared to pull the trigger on such a large amount of money all at once, dollar cost averaging is definitely better than holding cash and waiting for the nonexistent day you'll feel "ready" to invest it all.

forummm

  • Walrus Stache
  • *******
  • Posts: 7388
  • Senior Mustachian
Re: Beginner investing questions
« Reply #8 on: May 11, 2015, 07:52:17 PM »
I think it's probably a more valuable use of my time to just setup automatic investments with my Vanguard mutual funds (each payday the money gets automatically pulled from my checking account and invested into my mutual funds) than to spend the day watching numbers go up and down and trying to decide when to buy. You might save a few pennies here or there (or might lose some). But I make enough per hour that my concentration at work is more important than the few pennies. I think making sure I buy each payday is more likely to make me more money long term than trying to time intraday.

But if you think it's fun, it's pretty cheap fun!

astvilla

  • Stubble
  • **
  • Posts: 233
Re: Beginner investing questions
« Reply #9 on: May 12, 2015, 06:44:05 AM »
Some beginning investing questions.

If one wanted to buy an ETF such as VTI, one can do it any point during the day. A quick look at a chart of recent behavior shows it swinging up and down pretty regularly. It would make sense to me to buy it with a limit order when it is in one of its lower swings. Looking at the chart and the up and down swings in a short time frame are easy to estimate. The only risk is mis-estimating and "never" buying because it has moved up "permanently". Is this just so obvious that "everyone" does this already?

With dividend paying stocks, the date and amount of dividend payment is published knowledge and readily available. What is to stop someone from buying a lot of a stock right before the dividend is paid and selling it soon after. Other than the brokerage fee to trade and bid-ask spread, am I missing anything?

What you're describing is called Market Timing, and it's one of the worst investor fallacies currently known.  It's good to ask questions, especially when you feel you're "missing something".

I recommend watching the short Boglehead Video Series:

http://www.bogleheads.org/wiki/Video:Bogleheads%C2%AE_investment_philosophy

Yes the guy is silly, and a bit over the top, but the advice is geared towards newbies and it's easy to understand.  Video #5 directly applies to your question:

------------------------
Never try to time the market (Rule #5)

The vast majority of investors earn less than the market due to two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.

https://www.youtube.com/watch?v=b3pnpbWYfwc&list=PL21534875BFC50EEE&index=7

is it market timing? buying the ETF like VTI with a limit order just means you are buying the ETF at a specific price. this allows you the comfort of knowing what you paid for it instead of buying the fund VTSAX because it could rocket up at the end of the day. of course this method the op is suggesting only saves a very small amount of dollars than he otherwise would have spent so maybe it's not worth it. of course the index could fall below the limit order too. i think what the OP is trying to do is just control the price he buys it and save a couple bucks, nothing really significant.

how would market timing be defined? do you actually wait for the market to move in a direction then place limit orders betting on the market further tanking? or just place limit orders now and whenever it drops to OP's price, it triggers and that's it? if the OP is placing limit orders on a price for VTI pretty close to the current price, prices that it's been in the last couple weeks, is it market timing or a very toned down version of market timing that gives the OP comfort of knowing the price he got without waiting for some big correction? maybe if he put a limit order way below the current price it could be really timing the market?

and if it's a limit order he's not really timing, already placed the order. and technically because crises will always happen VTI will hit OP's limit order price anyway...one day lol.

postvmvs

  • 5 O'Clock Shadow
  • *
  • Posts: 45
  • Location: NJ
Re: Beginner investing questions
« Reply #10 on: May 12, 2015, 04:14:38 PM »
Just to be clear I am looking at the last week or two and using that to make an educated guess at a likely low that will be hit in the near future (next week or two) due to normal fluctuation and then placing a limit order for that amount, not waiting for a 'major correction' or sitting around checking the current price all day long. Just rough back of the envelope numbers show doing it this way has saved a few hundreds bucks versus buying at the average price during that time.

I don't think that falls under what most people mean when they say "market timing", but I could be wrong.

forummm

  • Walrus Stache
  • *******
  • Posts: 7388
  • Senior Mustachian
Re: Beginner investing questions
« Reply #11 on: May 12, 2015, 05:22:02 PM »
Just to be clear I am looking at the last week or two and using that to make an educated guess at a likely low that will be hit in the near future (next week or two) due to normal fluctuation and then placing a limit order for that amount, not waiting for a 'major correction' or sitting around checking the current price all day long. Just rough back of the envelope numbers show doing it this way has saved a few hundreds bucks versus buying at the average price during that time.

I don't think that falls under what most people mean when they say "market timing", but I could be wrong.

The risk is that you don't hit the price you're looking for because the market goes up say 5% during the couple weeks you're waiting (and doesn't come back down before you adjust your price upwards). Then you lose quite a bit of gain. I don't know how often those larger loses will happen compared to the very small gains you get by playing the price target game. Maybe it's a wash. Who knows? If you're having fun, and make sure you keep investing continually, it's probably cheap fun.

tyir

  • 5 O'Clock Shadow
  • *
  • Posts: 60
Re: Beginner investing questions
« Reply #12 on: May 12, 2015, 07:19:19 PM »
Just to be clear I am looking at the last week or two and using that to make an educated guess at a likely low that will be hit in the near future (next week or two) due to normal fluctuation and then placing a limit order for that amount, not waiting for a 'major correction' or sitting around checking the current price all day long. Just rough back of the envelope numbers show doing it this way has saved a few hundreds bucks versus buying at the average price during that time.

I don't think that falls under what most people mean when they say "market timing", but I could be wrong.

The risk is that you don't hit the price you're looking for because the market goes up say 5% during the couple weeks you're waiting (and doesn't come back down before you adjust your price upwards). Then you lose quite a bit of gain. I don't know how often those larger loses will happen compared to the very small gains you get by playing the price target game. Maybe it's a wash. Who knows? If you're having fun, and make sure you keep investing continually, it's probably cheap fun.

Mathematically, the expected value of waiting is negative. If you expect the product to go up in the long term (which you should if you're buying it), then it necessarily follows that the product will (on average) go up in the short term. Of course it won't every time since markets follow "random walks", but in aggregate, it will go up. You can even calculate it, if it goes up 6% a year, then waiting a half a year will be ~3%,  waiting a week will be ~.115% (roughly, due to compounding). This is, of course, looking at expected value, the variance is high.

To reconcile this with how "easy" it is to wait for a dip, is you are only gaining a small amount from waiting for a dip, but it's a large loss if you missed a long-term low, as forummm describes. In aggregate, of course, it's a small loss.