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Finance Blog

Can you time the market? What's the right strategy for the average investor? 

Timing the Market

Anthony McCloskey

So you have decided you want to invest in the stock market. You've surely heard the age old adage "Buy low - Sell high", and now you are trying to figure out when you should Buy, and later how you will know when you should Sell. The answer is actually simpler than you may think...

When it comes to trying to figure out how to time the market, you simply shouldn't bother. The reality is, the best way for most people to get the biggest return from the market is simply to buy and hold, preferably an Index Fund. While this isn't the sexiest answer or the sexiest strategy, it is the most reliable. When it comes to your money and planning for the future, reliability beats sexy every time.

This is not to say that you cannot take advantage of certain market events. If the market takes a huge downturn, that is likely a great time to buy (while the prices are low). While this may seem obvious through the lens of someone following the "Buy low - Sell high" philosophy, it is shockingly counter-intuitive. Whenever there is a decline in the market, you will notice that nearly everyone you speak to about the markets will be talking about how they are steering clear, and what an awful time it is in the market. People fear short-term losses. But the reality is that any losses you may have taken in 2008 would be more than made up for (with a tidy profit if you bought more) by 2016. Again, this is assuming you stick with Index Funds.

Why Index Funds? The answer is simple, they are the easiest way to build a diverse portfolio. Buying individual company stocks is likely too risky for the average trader. You wind up either with too much exposure to a few individual companies or with a staggering number of individual stocks for which you can not possibly be doing the right amount of due diligence. While buying and holding is a tried and true strategy, when you own a lot of individual stocks, you also need to keep up with their financial statements and major events impacting each company. In short, you have to do what Jim Cramer calls "Buy and Homework". This may be fine if you have the time and know how to keep up with a lot of individual stocks, but for most people, it is better to invest in an index fund that either tracks the entire market or the S&P 500, or some other index. These funds give you a small amount of exposure to the entire market, and the fund tracks overall market performance. Put simply, if the market goes up, the fund goes up, and vice versa. This gives you instant diversification and alleviates the need to do any amount of homework.

One final key element to this investment strategy is to recognize that you have not taken any losses or earned any returns until you cash out. We probably all know someone who watches their 401K or Brokerage account like a hawk and complains about taking big losses one day and raves about making big gains the next. The reality is, until you cash-out, you have taken neither. This is called realizing the returns. Basically, selling some or all of your holdings for cash. Until you do that, yes your portfolio may be worth more or less than it was the day before, but that valuation is somewhat meaningless. Keeping this in mind can make the downturns less painful (and help prevent you from prematurely pulling out of the market). Remember, most of us are investing in order to pay for our retirements. That means remembering that these are long-term plays, we should not view them with a short-term mindset.