For an investor, a stock’s price isn’t everything. It may be tempting to focus on the top, or even bottom line that appears in the pages of stock prices. But in the long term, it’s far more useful to pay attention to what’s going on with a company’s share price. That is because many people have been using something called “the 20% rule” while they invest their money.
The 20% rule dictates that you should buy stocks when they dip below their original investment cost by at least 20%. The idea is simple: as long as you buy when stocks go down, you will eventually make profit when the stocks rebound and gain value. This is the opposite of what a lot of individual investors do, which is to buy when their stocks rise.
The idea isn’t unique or out of this world; it’s simply a smart way to go about making money from your investments. It’s also known as “dollar-cost averaging,” which may make it sound like you need a lot of money to make good use of this strategy. But all you really need is cash available for investment, something that most people have in their bank accounts and 401(k) plans.
The 20% rule can be used in many different ways. You can use it to buy more stocks, hold your current stock for a while, or even sell off some of your holdings before buying back again. The idea behind all of these methods is that you’re using something called compounding interest to make money from the market.
Compounding interest does exactly what it sounds like: it computes and adds interest (hence “compounding”) on both sides of an equation. The effect is that your original investment becomes worth more because it has been earning interest for a period of time. That means your investments are now worth even more than they were when you originally invested in them.
When you use compounding interest to make money from stocks, you buy low and sell high. It’s that very process that creates the 20% rule. You wait for the market to dip (and stocks rarely go up in a straight line), and then take advantage of the situation by buying more when they dip below your original investment. When they recover, you have made a profit on both your old and new investments – even though you haven’t sold a single share of stock!
Keep in mind that using the 20% rule isn’t always as simple as it might seem. There are several things that you need to keep in mind when implementing this strategy with your own portfolio. One of the most important is knowing which stocks to invest in.
Some people have done well by investing in stable, well-known companies. Others have turned a profit buying into unknown businesses, which are also known as penny stocks (because their prices often begin under $5). You can decide how you want to use these strategies based on what you believe will be a good investment opportunity for your money.
However, you must keep in mind that the 20% rule doesn’t always work, especially if you try to use it on individual stocks. Your best bet is to use it as an investment strategy that’s part of a larger portfolio. You should consider your 20% rule purchases to be investments that are meant to help your overall portfolio’s value continue growing for the long term.
There are other things you can do if you don’t want the risks that come from investing in individual stocks. It might make more sense to buy exchange-traded funds (ETFs) when using the 20% rule; these are funds that hold dozens or even hundreds of different stocks in a single package. You can invest in one of these funds and let it do the work of buying and selling stocks for you – while you watch your money grow.
The 20% rule is a good strategy, but it isn’t perfect. You should be prepared to wait at least a year before you start seeing any kind of profit from your stock investments, though returns could take even longer than that. Even so, the 20% rule is something that has worked for many investors over the years – and it can work for you too if you’re willing to use it correctly.
I hope you find it a useful strategy that you can use to make money from the market. If you have other strategies or tips, be sure to share them with us in the comment section. Thank you for reading!
This is why we focus on good stock picks, and not bad ones. We only invest in those stocks that are growing and whose valuation ratios are still attractive. We do not buy stocks because their stock prices are low right now – because their prices will go even higher next year when the market corrects itself. This is why we focus on good stock picks, and not bad ones.