In trading with stock, timing does not matter as much as time itself.
Most novice investors fret about the timing of their first stock acquisitions. Kicking off from the block at the wrong time within the market's fluctuations can mean being left behind holding nothing but your shirt and pants.
Not to worry! For first investors, time is your friend. In the long run, the compounding effect of a properly researched investment will yield high returns, no matter how the market was doing at the time you bought the shares.
Use your time well
Instead of worrying about when to buy your first stock, focus on the length of time you plan to hold your money in the market. Each investment provides its own unique levels of risks and returns and, as such, has its own unique and suitable investing time requirements.
Most bonds generate smaller and steadier returns for investors who prefer short-term investments. Ibbotson reports that short-term U.S. Treasury bills generated approximately 3.7% annual returns from 1926 to 2003, 2003 being the tail-end of a bear market. Although the figure is not so attractive today, we have to consider that inflation was almost nonexistent during that period; earning 3.7% average annual return then would have been a desirable level before the turbulent 1970s.
For longer investments, such as government bonds, one can gain a somewhat better return, which had an average annual gain of 5.4% from 1926 to 2003. Unexpectedly, such gains were comparatively volatile. For example, in the 1980s, they generated almost 14% per year while, in the 1950s, they lost an average of about 4% annually.
In general, stocks have also benefitted investors. Large-cap stocks, for instance, offered an annual average of 10.4% from 1926 to 2003 – relatively a step higher than bonds. Nevertheless, the range of the returns for stocks is nowhere higher than that for bonds during the same time frame. Stocks declined slightly in the 1930s but also regained during some significantly solid decades, during the 1950s (at an average annual return of 18%), the 1980s (16.6%) and the 1990s (17.3%). We can all appreciate that consistent performance of stocks.
At what point will you need the money?
Keeping your investment for a longer period will allow you to grow your money as you will have the time to weather periods of low returns and to accept risks.
However, if you want your money within the five years from now, you may have to forget individual stocks and stock-centered mutual funds. In case your time frame is only three years, you must likewise leave out bond mutual funds and real estate investment trusts (REITs), which tend to go down as interest rates climb.
Having eliminated those choices, what do you have left? You can invest in individual bonds or certificates of deposit (CDs) which have less than three years durations, in a money market fund, or in a savings account. Each of these options delivers returns while assuring you of getting your principal back. With your short time-frame requirement, you cannot afford to accept more risks for your money.
Nevertheless, stocks can provide potentially high returns you will need for your long-term objectives, such as a dream house or retirement. Many cannot pass up the opportunity to gain higher returns.
When to sell
Having decided where to invest and when to invest, your next hurdle is when to recover your money. This will not cover bonds which automatically sell themselves once they mature; but it will cover stocks or stock mutual funds.
Some “expert” investors claim to have the ability to "divine" the market’s timing, knowing its rise and fall. With their advice, you will need to sell their stocks just before the market drops, or buy them all back as the market gets ready to climb. Sadly, if it were all that simple, these “experts” would all be vacationing in the Maldives and in Monaco, instead of spending their time selling their expertise to other investors.
Be that as it may, when you see a general economic crisis crushing corporate revenues and companies folding up, you have no other choice but to unload some of your expensive, lower-quality investments. Aside from such overall dire economic events, we cannot find a foolproof method for timing the market’s movements.
Many investors in mutual funds withdraw their cash as soon as returns slow down. However, some academic researchers claim that butterfly investors who fly from one fund to the other, looking for performance, end up worse than those who remain in place. The simple rule is: Stick it out with a fund no matter what happens – except for one case.
An actively managed fund provides protection through a dependable professional money manager. However, if that he or she leaves your fund to manage another, another manager will take over to handle your money with the same expertise – although you can always decide to sell instead. Remember that three or more lean months are not enough reason to bail out.
In selling stocks, you need to consider two warning signs that will compel you to sell:
When the company’s fundamentals change:
The possible presence of a new competitor has made its essential products obsolete. The business may have branched out into concerns significantly disconnected from its central skills, confusing your appreciation of their business.
The stock becomes overvalued:
The market may have bid the company's shares up to unsupportable levels. The stock may crashed based on the smallest negative press releases. The risk of such a fall may outweigh any tax hit you would take if you sold today.
With these two questions in mind and carefully considered, you may ignore other warning signals on the horizon.
Do not let the market buzz bother you
Media focus on Wall Street activities, although concentrating mainly on a single index, as if it represents the market as a whole. High index level? We have a bullish market! Index is down? The bear market is here! Index fluctuates? We have a volatile market!
There are investors, especially those who are essentially technical analysts, who observe market fluctuations to determine whether investors will take the market higher. For us, this is a meaningless exercise. In the long run, effective investing does not depend on understanding the market as a whole, but on comprehending the strengths and weaknesses of each concerned companies. In spite of the noise and the hype going on in the market, buying and holding on to your investment is still the finest method to gain sound long-term benefits.
Review, review, review
On the other hand, you may decide to fill your portfolio with only a few stocks – no matter how judiciously picked -- and leave them to germinate. Just like plants, investments require periodic care and attention in order to grow. But if you do not have money in government bonds, which have guaranteed rates of return, you will have to monitor your investments now and then to see if they are afloat -- and doing so more aggressively and economically than other, like alternatives.
Assessing your investments, especially when you make mistakes, provides a vital lesson for future growth. Learn to overcome such errors by not repeating them your success depends on it. Spend enough time to evaluate your portfolio every quarter, at least – but weekly is better. Although you do not need to sit -- and sleep -- before your computer to monitor your investments, never leave them unattended either.
Beyond the basics
There you have it – with your first lessons in Basic Investing, may you have a happy time investing in the future! Still, there is much to learn, for instance, how to value stocks, and many more. Go slowly, relax along the way when you can and enjoy learning the adventure of investing.
Read our newsletter for free within a month. While we have different views, our diversity provides us a deep source of valuable insights, thus, making us more sound investors. We have a disclosure policy.