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Protect your money: timing the market

I wrote about [tag]timing the market[/tag] in my previous post to emphasize this approach and to show that it is a [tag]good strategy[/tag], which every [tag]individual investor[/tag] who wants to manage his own [tag]portfolio[/tag] actively and [tag]make money[/tag] consistently should learn and practice as long as he or she becomes a pro. This strategy can help you to survive [tag]bear markets[/tag] like this one with the peace of mind while protecting your own [tag]money[/tag] you already have made during your [tag]investing[/tag] career.

Some advisers will insist that it is not possible to time the market and that inexperienced investors will loose money. They claim that the best approach is to “buy and hold”. Maybe they are right when talking about inexperienced investors. This is why I advice you to learn this strategy as long as you would be able to apply it successfully. In such a case you stop losing money and having a headache every time the stock market gets into a correction or a bear down trend. Maybe those advisers are right that in a very long term of 20, 30, 40 or 50 years it may really work well. When you take a look at the history of the market, it really rose higher every decade. You could hear ads saying something like: “If you purchased the XYZ stock 10, 20, or 30 years ago, you could have XXX thousands of dollars or millions of dollars on your account by today…” But not every stock on the market follows the index. Some stocks outperform, some stocks under perform the index. Which of them do you hold? Well, if you do not have time to actively manage your portfolio, then buy a stock and forget it and hold it. One day, you may find out that your stock is worth a penny, while you bought it for 50 dollars, or the company bankrupted at all. Or you may watch your stock regularly to avoid stocks of bankrupting companies, but you would suffer from price drops of 20, 25, 30 or more per cent, headache, and thinking whether you should sell or excusing and cheating yourself with “it must go back” thoughts. What if it won’t go back?

I believed that the “buy and hold” strategy was good for mutual funds or ETFs, but not stocks. I thought that funds or ETFs are not so prone to collapse or bankruptcy. Well, look at today’s market. I was applying this strategy to my IRA account in which I buy and hold mutual funds and ETFs only. Today, my account is more than 40% down, it is 47.83% down, to be exact. How long it will take me to brake even? All these ETFs and funds will have to make almost 100% gain to erase a loss. How long will it take to recover? Will it happen at all? Since we are in a crisis who knows how fast and strong the next economy growth will be? What if the next following 4 years, the market will go sideways in a choppy manner? Are you willing to wait for 4, 10, or 20 years just to break even? If I had used the same principles I use for stocks on my IRA holdings, I would have been sitting in cash and waiting for better times with peace of my mind.

The stock market is at 11-years low levels these days. It can go even lower. If you bought your holdings ten years ago, and as a conservative investor you bought stocks copying one of the indexes, your holdings are probably worth your initial capital today. Are you willing and happy losing 11-years gains of your investments or even get lower than you were before you have started investing? If you are close to your retirement, it is probably a sad look at the balance sheet of your portfolio, right? If you have sold, however, at the time the market broke down for the first time somewhere at 13,000 points and followed the strategy of timing, or any similar strategy advocating buying and selling stocks according to the stock market’s trends, you would be now sitting in cash with all your 11 years gains in your pocket. Do not worry, I did the exact same mistakes. Fortunately, we still have a chance to correct it. It is not easy strategy. You need to learn it and use it wisely, but if you do so, it is very rewarding.

On the internet I have found an excellent article on this topic on a Solitary Trader’s blog.

What If – What If?

Chuck LeBeau

As the Director of Quantitative Analysis for SmartStops.net, I spend a great deal of time browsing the web and other sources looking for hard to find information about exit strategies. On more than one occasion I have stumbled upon articles that oppose any effort at market timing; to further their argument they cite various studies that show how much long term performance might suffer if market timers somehow missed “X” number of the biggest up days in the market.

These highly biased studies are assuming that any attempts at market timing will be totally futile and ineffective. These studies assume that market timers somehow missed all the biggest up moves and yet suffered through all the biggest declines. With that assumption, it’s not surprising to see these studies conclude that with bad timing the performance would have suffered a great deal. I believe these studies are totally one-sided and extremely unfair to market timers. To set the record straight I’m going to take one of the most credible and complete studies and present the results in a manner that is fairer to market timers. [Read the rest of the article here…]

Timing the market can be rewarding to your portfolio. You would be able to sell when the market shows weakness and keep your profits. You would be always able to start buying the same stocks back (or funds or ETFs), when the market shows strength again. If you have had leaders in your portfolio, it would start making money at the same point where it stopped before the market corrected or collapsed.
Timing the market is not about fishing for lows to buy and highs to sell as the advisers advocating “buy and hold” strategy say. Timing is waiting for the strong, trending market, and for the stock breaking to new highs or breaking from a base to buy, and waiting for the stock to retreat to 50 day MA on unusually high volume, for example, or hitting your trailing stop loss order to sell. It is not easy to learn it. It needs a lot of experiences to implement such strategy successfully, but it is possible. If the traders such as Jesse Livermore, Nicholas Darvas and many others could do it, why not we.

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2 responses to “Protect your money: timing the market”

  1. Lara,
    thank you for your comment. I am also learning and this blog shall record it for any new investors.

  2. Susan Kishner says:

    I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

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