5 ways to "Time the Stock Market"

by Jeff Kennedy, CIM

Buy low...Sell High...It's that easy right?

Stock Market investors are a jittery bunch.  20%+ downward corrections in a single day have happened!  Here are just a few examples of large scale sell offs in the market over the past couple of decades.  If you own mutual funds you are not immune, just the opposite.

  • 1987 Black Monday
  • 1990s Iraq invades Kuwait
  • 2000 Dot Com Bubble
  • 2001 September 11th Attacks on World Trade Center
  • 2007 Chinese Stock Bubble
  • 2008 Subprime Crisis
  • 2010 European Debt Crisis
  • 2010 Flash Crash
  • 2028 Pending Alien Invasion!

(Okay that last one hasn't happened yet, but I predict it is going to!)

If it weren't for the fact that the stock market traditionally has one of the highest returns of any asset class, people would avoid it like the plague.

For the average "Buy and Hold" / "Dollar Cost Averaging" / investors, these major corrections are gut wrenching times.  Instincts tell you to run for the hills.  But it doesn't have to be that way. Major corrections should be major buying opportunities, not major tragedies.  This is the way a contrarian investor thinks.

The reality is the the market is not "efficient". It tends to overreact both negatively and positively to news.  This is caused by overly emotional investors, covering of either long or short positions (an advance topic for another blog), automated trade software and stop loss orders.  

Sadly, investors are often bandwagon jumpers that tend to buy when the market is high (hey did you hear Google is near its all time high?...time to buy right?) and sell when the market is low (Oh my lord Oil is heading to $20 a barrel...run for the hills right?).  A contrarian attempts to do the opposite.  They establish rules to take the emotions out the equation.  Contrarians view the highest risk point is when the market is at it's peek.  They see the lowest risk point is right after a crash (when everyone is else is scared, buying beef jerky, grabbing their dog, maybe the wife, and heading for the hills in their pickup truck with their shotgun).  

| "Contrarians view the highest risk point is when the market is at it's peek" |

Timing the Market is often viewed as a secret formula on genius gurus involving Ouija Boards, Graphs or Market Fundamentals in an attempt to divine the market direction.  The reality is that many of the major market corrections are completely out of anyone's control or forecast.  Major events that spook the market like 9-11 and Iraq's sudden invasion of Kuwait weren't on most people radar.  ... And none of you are predicting the 2028 Alien invasion ... except me!  ;~)

The only thing I can say with 100% certainty as long as there is greed in the world there will continue to be major stock market corrections. So the question is, how do you prepare for it?

I view "market timing" as a simple mathematical exercise.

Here are 5 ways to "Time the Market"

1. If you dollar cost average (buy a little every month) and buying for the long term, consider sidelining 20% into cash each month.  If the market takes a 10% correction, put 1/2 of your money into the market that month.  If it happens again the next month, invest the other 1/2. Go back to the usual pattern in month 3 of putting money aside.   

2. If you are not dollar cost averaging, establish hard rules for buying and selling.  Example, buy a set amount of money every time the market drops more than 10% from a recent high and sell a set amount of money every time the market goes 20% above a recent low.  Follow these rules every time to take the emotions out the trades.

3. If you hold individual stocks, you should have rules established for maximum percentage holdings for any given stock.  If an individual stock out performs the portfolio, re-balance by taking a profit on some of it at least one per year (Jan is a good time, so you can postpone paying the tax man for a year).

4. Tax loss harvest in November/December.  Selling those dud stocks that you determined were just poor choices (verses just cyclical timings) will give you more cash to play with when corrections happen (and they will).  It will also give you a capital loss on your tax return.

5. Listen carefully for overall positive or negative trends in sectors or the overall market.  Lots of doom and gloom news are potential buy signs.  Over confidence is a time is a potential sell sign.

Bonus Tips

If you are losing sleep every time the market loses a percent or two, you need take a hard look at a few things.  

1. Your risk profile 

2. Your overall diversification across multiple Asset Classes.  

3. Your established rule book.  (Write your down your investment rules down and follow them).




Want more articles like this one? 

Oh and remember Stocks should be just part of a diversified portfolio.  

Check out this article for more information on diversification...


Buy Low, Sell High and have a Richer Journey ;~)

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