Wednesday, December 6, 2017
So You Think You Can Time the Market?
One of the biggest mistakes you can make as an investor is trying to time the market. Timing the market means you are attempting to buy at the exact right time and sell at the exact right time. This sort of mentality has cost people millions of dollars in the past and will continue to do so in the future. Sadly it is our natural instinct to want to go in and out of the market at opportune times. The biggest reason why this is a bad move is quite simple: No one ever knows what is next. The only people that can predict the market end up in handcuffs soon after, so what about the rest of us? For all of us everyday people, we must adopt a strategy of buy and hold or else it could cost us dearly. In today’s post, I will give my top 5 reasons why you should never try to time the market. Doing so could end up making you a true Money Moron.
1) Buy low and sell high right?
The reason why this is so troubling is that you will never know how low or how high any investment can go. One glaring example is Enron. The companies stock hit an all-time high in 2000, trading at over $90 a share. One of the largest natural gas companies in the world, it seemed as if it could go nowhere but up. One year later, however, the stock was trading at around $20 a share. For the people who bought it at $90, they took a significant loss. Sadly, some of them doubled down buying the cheaper shares seeing a discount stock that could rebound and make them huge money. Little did they know that the stock would be worth less than a dollar a share in less than 4 months and they would lose everything. For the people who bought at $90 a share hoping to gain more growth, they didn’t know they were at the top of its value. Others thought the $20 mark would be the bottom and they ended up losing everything. The only people who truly knew what was going on were on the inside and yes, they all ended up in jail. The moral of the story is no one knows where any stock will go, so never try to guess that. Buy a position because you believe it will go up and sell because you wish to liquidate your position.
2) You will miss out on drastic rebounds
With every market downturn, there has always been a subsequent rebound. The problem lies with the fact that no one knows how long it will take to get back to its previous level. If you panic and sell while the market is tumbling, you will miss out on the subsequent rebound. This can be extremely harmful. Many people get so freaked out about market panic that they move all their money into fixed income, so they don’t absorb the blow. The problem with that maneuver is that yes you will not drop as much anymore, but you also will gain nothing on the rise of the market. Missing out on rebounds can cost you huge. Check this out:
Crisis: Korean War (June 1950)
Value Lost (S&P 500) -15% in 5 Weeks
Change after 6 Months: +31%
Time to return to former value: 3 months
Crisis: Terrorist Attacks (Sept. 11, 2001)
Value Lost (S&P 500) -12% in 1 week
Change after 6 Months: +19%
Time to return to former value: 2 months
Crisis: US Financial Crisis and Bailout (Sept. 2008)
Value Lost (S&P 500) -36% in 10 Weeks
Change after 6 months: +11%
Time to return to former value: 27 months
Even the disastrous 2008 crisis returned to normal. If you jumped from the market during those down times you would miss out on buying on the cheap and would not take advantage of the recovery. You must stay invested and not let emotions rule you. I know it’s tough because it’s your money, but understand there will be rough patches.
3) Dollar-Cost Averaging
Most people do not know the importance of dollar-cost averaging. Most people don’t even know what it means. What dollar-cost averaging is in it’s simplest form, is investing on discount. The natural inclination when the markets go down is to be upset. People get frustrated that the investments that they have are now worth a little less. What they should be is happy. If you are making regular contributions, you are now buying investments for less than they cost before. For example: Say you buy a stock every week and it costs ten bucks for one share. After four weeks you would have invested $40 and have 4 shares. Pretty simple right? Now let’s say that on the fifth week those shares dropped in value to $5 a share. You now have 4 shares worth only $20. That week you contribute your usual $10 and it now gets you 2 shares instead of only one. The very next week the stock rebounds and goes back to where it started, $10 a share. Once it reaches its old price, you now have 6 shares worth $60 instead of only having 5 shares worth $50. You gained a full share, for not doing anything! That is dollar cost averaging and the only way you can take advantage of it is if you stay invested in the market. If you decide to stop investing during down times, you lose the chance at buying cheap. It is truly one of the greatest growth opportunities you will ever have so don’t panic and miss out.
4) Investing is like a bar of soap, the more you touch it, the smaller it gets
Every time you touch your investments they shrink. Taking from them costs you growth. Taking from them can also cost you fees. Buying and holding onto your investments is the best way to make money in the long run. It is tried and true that if you keep your investments far away from you, you are less likely to be tempted to use them. This only works if the rest of your finances are fundamentally sound. This means you should have a balanced monthly cash flow, stay out of debt, and protect your assets with insurance. It should be everyone’s goal to have some of what I call, “Bye-Bye Money.” This is money that you send away strictly for long-term growth. If every time the markets go up or down you are making moves, your money over time will go down. It is not a dance you want to take part in.
5) It is stressful and time-consuming
Paying too close attention to the markets will literally drive you crazy. Every stupid word out of the president’s mouth or release of a new cell phone will have you concerned. You will constantly be worried about making the wrong move and you will always second guess yourself. Setting it and forgetting it is easy on the brain and easy on the heart. Most people don’t have a strong enough stomach to handle the day-to-day ups and downs of the stock market. There is far too much volatility for my liking and its all based on nonsense. It is literally a bunch of guys in suits playing blackjack. Instead, focus on the long-term. Worry about the year-end and not the weekend. Unless it is your job to monitor stocks, it won’t be fun for you to do it.
Timing the market will never win over time. The market is too unpredictable for anyone to win consistently by doing it. Just in case you think you can do it make sure you tell me your secrets because I would love to know. For the rest of us, we can focus on the fundamentals including consistent contributions, sound financial planning, and a solid budget. Leave the stock speculations for the gamblers.
Thanks for tuning in today as Money Moron Week continues at Budget Boss. Don’t forget to tune in tomorrow as we discuss insurance and the mistakes people make with it. If you have any questions about investing, please feel free to contact me at firstname.lastname@example.org. Don’t forget, our “2018 Financial Goal Setting Workshop” is next Tuesday, December 12 at 5 PM from Innovation Works in Downtown London, Ontario. Have a great day Bosses!
“In long term investments, you don’t need day to day management.” – Shiv Khera
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