Are you tired of earning 5%, 8%, even 15% annual returns from your stock portfolio? Want to earn triple digit gains from your stock picks? Not only is it possible but it?s absolutely probable with a few solid strategies.
In Part Two of this article, I reviewed the importance of having strict buying rules to minimize your risk when investing your money in small and micro cap stocks. Here, in Part Three, I?m going to further expand and modify rule number two.
Rule Number Three: Don?t try to buy at ?perfect? prices.
In buying small and micro cap stocks, know that you will almost never buy in at the ?perfect? price. If you?ve researched a company thoroughly and are confident that its price will move upward over the short or long term, then do not wait for a ?perfect? price. Chances are you will almost never buy in at a perfect price. Small and micro cap stocks almost always have greater volatility than large cap stocks and inevitably will have days of rapid price spikes upward and downward. And it?s impossible to be right all the time about when these spikes will happen.
Furthermore, the law of averages should even out for you over time when buying into small and micro cap stocks. Sometimes the price will dip after you buy into a stock and you may experience immediate regret. Other times the stock?s price will rise upward from the moment you buy in and you would have never been able to buy the stock at a lower price. But if you?ve applied rule number one, even scenario in which the stock dips immediately after you buy in shouldn?t cause you to lose faith in your stock pick, because it does take a strong stomach to invest like this. I?ve had scenarios where a stock lost 10% on the same day I had purchased it, only to rebound by 60% in the next month.
So instead of using a specific price point to buy a stock that seriously interests you, use a price range instead. Using hypothetical company YYY as an example, if you absolutely love the future prospects of company YYY, determine a price range that you would be okay with after studying its historical price charts. If you decide that you would be happy buying this stock at a range of $2.90 to $3.10, and the stock is sitting at $3, then go ahead and buy.
I know other financial advisors that will disagree with this advice and declare that if the stock?s technical charts show weakening indices, the wait for a dip in price before deciding to buy. Unless those technical charts are negative in almost every index, I wholeheartedly disagree. Technical indicators are never right 100% of the time, often giving ?false? positives and ?false? negatives. Furthermore, they are even less accurate with volatile small and micro cap stocks because their inherent volatility makes their technical charts harder to evaluate for optimal buy-in prices. If an ?unknown? stock?s story eventually passes through media filters to reach the public masses, its price could spike very rapidly without any technical indications. If you?re solely using technical analysis to decide the optimal buy-in price, you?d be left behind in the dust when this happens. That?s why you should determine a buy-in range, and not an exact price.
Rule Number Four: Invest a smaller portion of your portfolio in riskier small and micro cap stocks.
This is a self-evident rule but I?ll review it anyway, because greed sometimes makes even the most rational of human beings do crazy things. I recommend devoting no more than a maximum of 50% of the total value of your portfolio to small and micro cap stocks. Using a combination of micro and small-cap stock picks and safer large cap stocks can help you easily outperform the S&P 500. But when your small and micro-cap stocks really start to outperform the large cap portion of your portfolio, it is inevitable that the following question will invade your mind:
If my small/micro cap stocks are up 75% and my large cap stocks are only up 15%, why not just shoot for 75% gains in my entire portfolio?
The only reason I recommend against this is because, hopefully, from part I of this article, you gained a sense of how research and time intensive the process is of uncovering great small and micro cap stocks. Frankly it?s not that difficult but it does take LOADS of time. If you build an entire portfolio with stocks like these, unless you have LOADS of time to constantly monitor every one, it?s a much better strategy to just boost your portfolio?s performance every year with great small/micro opportunity stocks while also investing in some less volatile ones that will give you a smoother ride.