Last weekend, I was out playing some racquetball with Freedom Thirty Five Blog and Modest Money. Jeremy has been raving about Jason Kellys book, The Neatest Little Guide to Stock Market Investing, for a few months now (check out his review ). He brought me a copy to read, and in record pace (for me, at least) Ive managed to read almost the entire book in a single week. It helped that I was visiting my family and had lots of down time!

How to pick stocks

Overall, the book does a really good job of focusing on key aspects of a company that you should be researching and explaining why these are key indicators of a potentially good stock pick. As someone who has been investing in stocks for a number of years, this book was a really good refresher. There is so much information out there, its hard to know whats relevant and what is not. It pains me to say, that most of my stock picks to date have been based on positive reviews and a decent opinion of the company. Thankfully, so far my individual stock picks (Shaw Communications SJR-B.TO and Husky Energy HSE.TO) seem to be solid picks as I go back and employ Kellys methodology.

Dollar Value Averaging

However, in my opinion the best advice comes when Kelly discusses Dollar Value Averaging (VA). He covers this topic as part of his chapter on permanent portfolios. The idea is that you have a base portfolio make up of indexes, ETFs or mutual funds which form the core of your investment portfolio. Individual stocks make up a  smaller portion but are key to maximizing your returns. In a book focused on helping research and pick individual stocks, Dollar Value Averaging works best on ETFs, indexes and mutual funds your core portfolio.

By investing money in the market at regular intervals, market variability is lessened. The simplest way to invest periodically is through Dollar Cost Averaging (DCA). This is what I do currently and what Ive always done. Each month, I transfer money into my brokerage account and buy whichever ETF is cheapest or brings my desired allocation back into line. However, this also means that I am buying the same amount of ETF whether the market is high or low. As Kelly points out if buying more shares when theyre cheap is a good idea, then isnt it an even better idea to send extra money when the price is cheap and less when its expensive?

Where DCA puts the same amount of money in no matter the price, VA sets a target growth rate and buys or sells shares to meet this growth rate. Kelly used the target growth rate of 3% per quarter, or 12.6% annually. To illustrate how VA works, Ive provided a hypothetical example with my stock in Vanguards FTSE Canada ETF (VCE.TO). I started with 200 shares this summer and the rest of the table are hypothetical prices of the ETF over the next year and a half, to illustrate the point. Kelly also provides some examples on his website.