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Buying in thirds

Buying in thirds is a time-honored Motley Fool practice, teaching investors to enter an eventual "full" stockholding in three separate lots. This is typically advisable for those who are new to investing, those who like a stock long-term but worry about its present valuation being high, and those who like to dollar-cost average.

Expanded Definition

We're not sure when and where we first started using this phrase in Fooldom, but "buying in thirds" has become for many Motley Fool members their modus operandi for entering incrementally into full long-term stock positions.

The idea is simple. Take the amount of money you plan to hold as a full position in that stock, and divide that amount of money by three. Then pre-determine when you will buy the desired stock, in those three pieces.

Typically, Motley Fool members who are buying in thirds will put their initial third into the market right away or in the very near term -- this puts "skin in the game" and gets you following that stock and growing more knowledgeable about it as a true owner, rather than a mere observer. Then, with still two-thirds of the position yet to complete, the investor will wait for future entry prices determined sometimes by feel ("I'm waiting for a sell-off" or adding on dips) or sometimes more mechanically. For instance, for David Gardner's initial holding of America Online stock (circa 1994), he mechanically bought in purely time-based increments (e.g. "on the 17th of every month"). It comes down to individual taste.

Psychological Benefits

Fool members who buy in thirds often point to the positive psychological effects of doing so. By taking out the "all-or-nothing" binary feel to stock-market investing, they spend less time kicking themselves when the stock goes against them the very next day or week. They have left some powder dry, as the saying goes. There is also a positive psychological effect of investing that initial third fairly quickly, in that members don't have to beat themselves up over sitting on the sidelines, or not buying into a (particularly winning) stock.

Looked at succinctly, after your initial third is bought, the stock will either rise or fall from there. If it rises, you can be glad you got a lower price with your initial third, and you are probably emboldened to buy further into a "winner." On the other hand, if the stock drops, you can be glad you didn't put all your money in right away, taking some solace that now you're getting even better prices with the majority of your money.

No wonder this approach is popular with many Motley Fool members, particularly new investors!

Weaknesses of Buying in Thirds

Studies done in and around dollar-cost averaging have typically documented that it's better to invest in lump sums than in increments. Why? These studies show that since the stock market tends to rise over time, the longer you wait to put in cash, the more opportunity cost you're paying.

Foolish investors can weigh that logic against the psychological benefits named above.

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