Monday, November 21, 2016
Strategy for Cashing In on the Next Stock Crisis Blip
With so many potential opportunities to pick up stocks on a temporary decline, it is a good time to build up excess cash in order to take advantage of the next mini-dip. Unfortunately since we are retired and only earn income through our investment portfolio, there is limited opportunity for us to accumulate cash. Our options are either to save up excess dividends or to sell stock shares in order to general a cash pool. With this in mind, a while ago I decided to stop reinvesting my excess stock dividends via the Dividend Reinvestment Program (DRIP). I also sold the shares of a stock in a registered account that hadn't increased much in value since purchase and didn't regularly increase its dividend. This provided me with a modest sum of cash to play with.
Yet predicting exactly when the next stock dip will occur is not as easy as it sounds, given that we are not monitoring the stock market every day, let alone every hour of each day. As well, stock prices do not always react as expected. After Donald Trump won the US Presidential election, we expected a fire sale in the worldwide stock markets. A temporary panic did occur overseas while the North American markets were closed, but stock prices rallied and even rose by the time the Canadian and US markets opened. It was not until several days later that the TSX experienced a mini decline.
In order not to totally miss the chance to "buy low" on the next stock decline, my husband and I use the following strategy when we have some extra cash to invest. First we decide which stocks we might be interested in buying, using target price, analyst recommendations, and other factors to guide us. In many cases, we look to just add more shares to stocks we already hold. Next we guess at a "low" price relative to the current share price and the predicted target price. I usually look at the performance of the stock over the last 3-6 months and pick a lower price somewhere along that spectrum. Finally I submit a "limit buy" order for the stock at my selected price, choosing the longest allowable term (up to 90 days for my discount broker, Scotia iTrade). Then we sit back and wait to see if the price hits. Note that my chosen price is a total guess and the stock may never fall that far, or may fall significantly more. But at very least, if the buy order executes, I will have purchased stock at a price much lower than when I placed the order and if all goes well, the price will eventually revert to that original level once the market re-stabilizes.
My limit buy bids in a couple of other stocks have not executed so far because these stocks have not fallen to my desired price. I will just leave the buy orders in play until they expire, in hopes of catching a price drop with the next event, or unless I happen notice a better opportunity. It is too bad that Scotia iTrade does not provide the term option to leave my order open until I decide to cancel it. So if I want my bid to continue beyond the 90 days, I need to remember to update my order to extend the date before it expires.
The other issue I need to worry about on a limit buy bid is the partial fill of an order that is not completed by the end of the trading day. This occurs when there are not enough shares offered at my limit price to complete my order. For example, I recently tried to buy 102 shares of a stock but only 100 shares were available, leaving two shares unfilled. The next day, the final 2 shares were filled but because the trades occurred on two separate business days, I was charged the $9.99 commission on each day! This was pure carelessness on my part. I usually remember to cancel the remaining part of the order at the end of the day in order to avoid paying an extra commission on such a small purchase. This was a reminder to me to be more careful next time.