Rule #1: Implementing The Rule

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Rule #1During this final week in 2006, The Simple Dollar is reviewing one of the top investment book of the year (based on Amazon.com sales). What does Phil Town’s Rule #1 really all about, and does it bring anything useful to the plate that we didn’t already know? This week, we aim to find out.

So, how do you get started implementing the investing program found in this book? Most of the latter half of the book focuses on just this issue.

First, take it slow. Don’t bet the farm on the first stock you find that seems like a good deal under this system. Keep your portfolio diverse and don’t bet everything on the first thing you see.

Second, use the three tools for identifying when to get into or out of a stock. Phil recommends using MSN’s Money Central for doing your research and finding out the values of these three tools; they’re all available on the site. If they all indicate “buy,” then buy; if they all indicate “sell,” then sell.

The first one is the MACD, or moving average convergence divergence. It identifies money coming into or out of a stock. If there’s money going in, then go in. If there’s money coming out, then go out.

The second tool is the Stochastic, which seeks to indicate major spikes in stock activity, which usually indicate great news or a major problem. You should follow the direction of these spikes.

The third tool is the moving average, which simply indicates whether the stock is currently moving in a healthy direction. If the current price is leading the moving average by quite a bit, it’s a good time to buy; if the current price is lagging the moving average by quite a bit, it might be time to get out.

The final step to implementing this plan is to overcome obstacles. Phil lists five major obstacles that hold back investors: bad debt (i.e., consumer loans), taxes on gains (he recommends shielding them in a Roth IRA or a 401(k)), overdiversification, fund managers (if you know how to invest, why let them have a cut?), and fear. If you can overcome all of these, you’re ready to go.

Tomorrow, I’ll give a “buy or don’t buy” recommendation for this book.

You can jump to other parts of this review of Rule #1 by following these links:
Overview
The Four Ms (and an addendum)
The Five Numbers
Implementing The Rule
Buy or Don’t Buy?

Rule #1 is the eighth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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