Entrance strategy - A step by step approach

There is no perfect entrance strategy for every individual; your strategy will depend on your personal situation, your time horizon, and your willingness to take risks. However, a rules-based investment strategy can help all investors time their entrance and manage their risk during market volatility.

First thing first: the basics

Diversification, risk management, thinking long-term, and ensuring you aren’t investing beyond your means are all important parts of investing. Diversification can be found in the form of funds (mutual funds or ETFs), which are baskets of securities such as stocks and bonds. Mutual funds are actively managed and seek to outperform an index, while ETFs are passively managed and track an index. Don’t put all your eggs in one basket, meaning you shouldn’t just invest in that one stock you have heard of or that one sector you are familiar with. And lastly your positions and portfolio risk should be aligned with your overall risk appetite.

The strategy step by step

When entering the market, you can either invest with a set amount of your money at one time, or you can invest a set amount gradually:  in a planned, timed cadence (i.e. over the course of a few months). By taking the latter approach, you are spreading out your investments over time to depend as little as possible on timing the market perfectly.

First, divide the total amount of money you want to invest into a number of equal “parts”. This can be any amount you feel comfortable with:  four parts, six, twelve, etc. Next, make your first purchase of any instrument you are interested in. As mentioned above, mutual funds or ETF are good starting points as they provide instant diversification.

Then subsequent investments should take place if one of the following triggers is met:

Trigger 1:  time

The next investment is at a set date you decide in advance (i.e. next month or next quarter). However, you may want to buy earlier, but only if you experience Trigger 2.

Trigger 2:  lower price

Suppose your first purchase was for an amount of €10,000 and you bought 250 shares of an ETFs for €40 per share.

The current price per share is now €36 or 10% lower. At this price, you can place a buy order and with €10,000, you can now buy 277 shares of that ETFs, so an extra 27 shares for the same amount of money. You don’t have to check prices on a daily basis and place your order when the price is lower. You could simply take advantage of a type of order known as Good til Cancel (GTC). Enter the order at the price you want and select the GTC duration. Other duration include, day order, one week, one month, etc. If this order is filled, you can immediately place the next GTC order that is 10% lower than €36. In practice this will be a buy order for 309 ETFs @ €32,40.

The 10% used in this example is arbitrary.  You can opt for 5% or 7.5% as a trigger, whatever you feel comfortable with. Of course if your orders aren’t filled because the price doesn't reach the level you specify, you can still purchase shares at set intervals specified in trigger 1.

Wrap up

A rule-based entry strategy for building up your portfolio prevents timing your purchase and emotional decisions. It is determined in advance what you will buy and when. First, you decide on the number of parts you are going to divide your capital in. Then, you make your first purchase and for the following parts: either the trigger is 'time', or the trigger is a set percentage price drop.

This strategy leads to a prudent build-up of your portfolio for a fair price, without the pressure and anxiety of timing everything perfectly.