If you don’t follow the stock market on a daily basis, you might be more relaxed than the day traders whCredit: Image: FreeDigitalPhotos.neto follow every tick. However, you might have also missed seeing the greatest six-week rally in the market since 1938. But who cares? For most people, the point of investing in shares is not timing the market in the short term; the aim of the stock investor (as opposed to trader) is to buy quality companies and hold onto them for the long term.
Since no one, including pundits, can predict stock prices, you need to have a way to decide whether to buy now, and if so, how much money to dedicate to stocks. For example, a client called me a few months ago to sell out his stock portfolio. He wanted to move the money from the equity mutual funds (invested in stocks) to CDs (certificates of deposit in banks that are insured). When I asked him if his investment time frame had changed, he said, “No, I just want to be out of the market now until things get better.”
A short time later, after a 20% upswing in the market, he called again, wanting to buy back into the market. I reminded him of our previous conversation where I had told him that it’s nearly impossible to time the market. “What you’re doing,” I explained, “is selling low and buying high. That’s a surefire formula for failure.” He understood the logic, but was wrapped up in the emotions of the market swings. He looked at the newspapers every day and, depending on the news report or op-ed pieces, he would make changes in his account, basing his financial behavior on what he had read.
Though the hows and whys of investing are a personal decision, the best way to decide whether you should own stocks is to confirm that you are a long-term investor with the tolerance level to handle the inevitable market swings. Find out how you can actually profit from a bear market by reading my article, How to Gain a High from a Low.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.