Every Sensible Stock Investor tries to manage his or her risks. There are various ways to do this. One of them is timing.
Most mainstream investment literature and academic studies deride timing as impossible and foolish. “You cannot time the market, and you shouldn’t try.” This view is based on the truism that “perfect” market timing is impossible. But it ignores the possibility that imperfect, or directionally correct, timing can help you make better investment decisions.
Rather than get stuck in dogma, let’s start with an open mind and see what makes sense. First, remember the two risks you are trying to manage when you invest: (1) The possible loss of money; and (2) the loss of purchasing power you will suffer if your investments do not keep up with inflation.
The most common way to reduce risk-approved by Wall Street and academia-is to diversify investments. That means putting your money into non-correlated assets that are unlikely to move up and down together. Diversification makes sense intuitively, and it works. Unfortunately, it can also hold you back.
The main diversification path for the average investor is bonds (or bond funds). Having a portion of your money in bonds reduces portfolio fluctuations, because (1) bond cycles are typically different from stocks, and (2) bond fluctuations are usually less severe than stocks. So bonds smooth out the ups and downs of your portfolio.
However, the return from bonds has historically not kept up with inflation. So the bonds in your portfolio do not protect you from risk #2 above-in fact, they increase it.
On the other hand, historically stocks have gained an average of 10% to 11% per year. That covers risk #2. But stocks have done that with much greater volatility than bonds, including some losing streaks of more than 2-3 years duration, and other “sideways” periods even longer than that. Those 10% to 11% returns have been “lumpy.” That increases risk #1, especially over short or medium time frames. That’s where timing can help.
If timing were perfectible, you would want to be out of the market when it is going down and in when it is going up. Nobody has a crystal ball showing where the market is about to go, so perfect market timing is impossible. But being, shall we say, “approximately correct” most of the time is not impossible. The overwhelming importance of managing risk #1 (that is, not losing money) suggests that the Sensible Stock Investor may want to try timing to reduce his or her overall risk.
It has been stated that the majority of investors say they believe in buying and holding. (Their behavior may indicate otherwise, but that is what they say.) If that is your comfort level, timing is not appropriate. Stick with diversification as your risk-management strategy.
But if you are not willing to sit passively and watch your capital erode during a market downturn, consider timing as part of your loss-control toolkit.
Note that you can use both diversification and timing. Timing is just a tactic within an overall philosophy of what I call “buy-to-hold.” That means that your intent when you buy a stock is to hold it “forever,” but that you will sell it when, for some reason, it individually becomes a loser, or when a prolonged bear market is taking your stock down with it.
Properly used, timing is not based on emotions nor on short-term volatility swings. Rather, it should be based on sound factors that have demonstrated that they are somewhat predictive of medium-term market trends. The indicators are calculated mechanically, and the outcome is used to influence buy, hold, and sell decisions. So your timing strategy is worked out beforehand, then executed in real time.
Both buy-and-hold investors and timers get in trouble when they don’t really follow their strategies. In each case, they substitute emotion for logic, feelings for strategies.
Sensible Stock Investors, in contrast, develop sound, logical strategies first, and then execute them to the best of their abilities. That does not mean that you stick slavishly to the first approach you ever develop. Indeed, annual re-examination of strategies is one of the keys to successful investing. But on a day-to-day or week-to-week basis, you should be executing your strategies, not jumping around based on the emotion du jour or the latest hot tip.
The most sensible way to do market timing, in my view, is to adopt a fact-based discipline that does not require emotional judgments, forecasts, or guesswork. I have developed such a system, called simply The Timing Outlook. It is based on four factors which have been shown, over the years, to impact market performance:
–The economy
–Interest rates
–Market valuation
–Market trends
There is not space here to go into the calculation of The Timing Outlook. But if you follow the links at the end of this article, they will lead you to where The Timing Outlook is explained in more detail and show you how to access it, pre-computed and updated every other week.
If you would like to learn about a stock investment approach that incorporates timing as one of several interlocking investment strategies, please consider purchasing the 5-star-rated “SENSIBLE STOCK INVESTING: How to Pick, Value, and Manage Stocks.”
Or, to learn more about the book, access other articles on stock investing, and subscribe to a free newsletter which gives you an updated Timing Outlook every other week, click here: http://www.SensibleStocks.com.
Thank you.
Dave Van Knapp, Author, “SENSIBLE STOCK INVESTING: How to Pick, Value, and Manage Stocks.”
Article Source: http://EzineArticles.com/?expert=David_Van_Knapp