Most financial advisors will recommend against any attempts to time the market. It can’t be done, they will tell you, and I agree. Timing the market or specifically identifying market tops or bottoms as opportunities to buy or sell is usually a futile effort. What financial advisors fail to tell you, however, is that market awareness is important and should be a factor in your investing decisions and strategies.
Photo by gadl via Flickr
To be aware of the market means to follow the market, even if at a very basic level. This doesn’t mean you need to know the exact level of the Dow or the NASDAQ each day, but it does mean you have a good feel for the current level and trends of the broad stock market. For example, you should be aware that we hit historic lows back in March of 2009 and in the last six months, we have had a fierce rally of over 50%.
Now, a market timer would typically try and identify a top at this point and perhaps sell their positions or maybe even go short against the market or specific positions. This is not the recommended strategy because it is too difficult to identify a market top to make a move this bold. Bold moves require a high level of certainty, and future predictions of broad market direction will rarely have such a high level of certainty.
Most professionals will recommend consistent buying of stocks over a long period of time. This dollar-cost averaging approach will prevent you from being over-exposed to a bad timing of purchases. Many will even recommend blindly continuing this approach no matter what the stock market has done or is currently doing. I disagree with this approach.
Going back to our current example, I would recommend using market awareness to adjust an investor’s buying activities. In a market that is up 50% in six months, I would not want to buy as much as I have been buying as the market has gone up over the last several months; therefore, I would cut my buying activities in half at current levels. If the market continues to go up, then you’ll continue to do well. If the market corrects and moves lower, you’ll be well positioned to buy larger “chunks” at lower, more attractive prices.
Remember, you want to buy low and sell high. Most people tend to buy high and attempt to sell higher, but in many cases, this doesn’t work. Since you’re probably focused on the long term, selling is not really on your mind, but this doesn’t mean you shouldn’t attempt to maximize lower prices and minimize your purchases at high levels.
Remember, a financial advisor is the professional or the expert in your relationship; therefore, they want to be the ones making strategic decisions. Furthermore, if you slow your buying when the stock market is high, you will be accumulating cash. Financial advisors typically don’t make money on idle cash. They want you to be fully invested at all times. Is that in your best interest or the financial advisor’s best interest?
To sum up, nobody is recommending becoming a market timer, but being aware of the stock market levels and trends can boost your long-term returns by helping you buy stocks or funds at more attractive levels over time.
I agree. Trying to buy in a up market can be more destructive than buying in down markets, because you never really know when things will suddenly flip for the worse. Thats why I never like to buy stocks at their 52 week highs.
I really like this post, since it addresses “market awareness”. If you are aware of some major moves in the market, you have another choice besides sitting on the sidelines with some of your money. You may also want to change your assets around a little bit to maintain the same asset allocation that you had before stocks made a major move. After a major stock market rally you would then sell some shares at pretty high prices.
This article is rejecting the idea of Passive Investing (staying at the same stock allocation regardless of how dangerously overvalued stocks are). That’s wonderful.
I favor a more straight-forward attack on the Passive concept. It is timing to buy more stocks when prices are reasonable than when they are insane. It’s the goodform of timing.
Investors who invest rationally (the rational thing is to take price into consideration when setting your stock allocation) should not be ashamed of what they are doing. We are the ones doing it right. it’s the Passives who are letting emotion be their guide (there has of course never been a single time in U.S. history when Passive Investing worked in the long term).
My motto is —
Say It Loud — I’m a Market Timer and I’m Proud!
Rob