At its high point in early April, the stock market had climbed
by nearly 12 percent since the beginning of 2013 -- just before it
lost more than 3 percent in only one week. Fluctuations like that
tend to bring out the emotional worst in investors, with people
chasing a hot market one minute and running for safety the
For this reason, as simple as it seems to say "buy low and sell
high," people often end up doing just the opposite.
To escape being lured into
emotional investing mistakes
, it can help to have a more disciplined system to approach the
market. Large moves in and out of stocks -- or any investment --
tend to increase risk. You can take the edge of off market
fluctuations if you take a more incremental approach to investing,
easing your way in or out of the market in small pieces rather than
Here are five examples of incremental approaches to
1. Dollar-cost averaging
This is a widely accepted method of smoothing out market price
fluctuations. By putting a consistent amount of money into the
market at regular intervals, your average investing cost will
reflect neither the highs or the lows of the market. The drawback
is that dollar-cost averaging isn't necessarily the most efficient
way to enter the market if you have
a large sum of money available for investment
all at once. It also doesn't really lend itself to providing a
selling discipline, or an orderly way to get out of investments.
One of the more tactical approaches to investing described below
can help overcome these limitations.
2. Price-sensitive investing
This can involve setting price targets on specific stocks, or on
the market as a whole. This will allow you to buy when prices dip,
and avoid chasing soaring prices. The only problem is that with the
market's tendency to rise over time, if you are too stubborn about
your targets, prices may run away from you and never come back.
This is why you may want to look at valuation rather than just
price, as described in the examples below.
3. Yield-based investing
The percentage of a stock's price that is paid out in annual
dividends is a straightforward way of looking at valuation.
Investing when dividend yields are high will not only help you buy
when prices are relatively low, but it will
keep your portfolio oriented toward a steady amount
of income production
. An alternative is to look at earnings yield rather than dividend
yield, to help your portfolio capture more growth-oriented
4. Relative yield valuation
How do you know if a dividend or earnings yield is good or bad?
One way is to use an alternative form of yield as a benchmark. For
example, with income yields such as savings account interest rates
and bond interest at historically low levels right now, stock
yields are relatively more attractive -- but only to the point that
rising prices don't wipe out that yield advantage.
There is a tendency for people to tout investing systems as ways
to beat the market. The truth is that the market is too
unpredictable for any system to work quite so magically. However, a
disciplined, incremental approach to investing can help you avoid
beating yourself with ill-timed moves.