Market timing how to#

You have to ask yourself yet again: Sell or hold? Now you wake up on that morning at the end of the chart and see the stock climbing steeply. The stock, after that drop which might have spooked you, continued to climb almost 50 percent from the dip, and almost 30 percent from that peak just before the dotвЂ¦ in just 18 months. (Again, the dot represents the previous cut-off point.) Should you sell now since it is вЂњhighвЂќ or hold for even more gain? (As before, come to an answer before proceeding.)Д«elow is what actually happened. It almost doubled again in the three years following.ДЄnd then you wake up one morning to see it begin to dip, losing about 10 percent of its value (as you can see at the tail end of the chart). With the benefit of hindsight, the best decision would have been to continue holding. The dot on the line shows the point at which we cut it off in the chart above. Now, let's expand the chart and see what happened. SoвЂ¦ back to the previous chart, what would you do? Before reading further, take the time to come to an answer. Going to the Bahamas for a vacation and not looking at the stock is making a decision: Hold. Not making a decision is making the вЂњholdвЂќ decision. This might come as a revelation to you, but no matter whether you mean to or not, you are making that decision every day. You wake up in the morning, you don't know what's going to happen in the future, but you have to make a decision on whether or not to sell your lovely stock which has doubled in the past five years. Those all may work some of the time, but there's no such thing as a perfect predictor of the performance of any investment. Some look to history to provide clues to the future, some look at rules or formulas which they presume determine future performance, and some use both.

Market timing how to#

All of us are trying to figure out how to obtain the best future outcome without knowing what that future holds. Here's the central dilemma underlying each and every investment decision you will ever make:Д®very investing post, book or article you read, every hyperventilating-Jim-Cramer show you watch, every debate among investors revolves around that two-fold dilemma. On the other hand, many held AOL at $2x, hoping for $10x, only to see it drop to less than $1x. Thousands of investors bought Microsoft at $1x, and felt good when they sold for $2x, only to see it go to $10x after they sold. You don't know if double is high enough or if you should hold the stock in hopes of more gains. Hey, double is high, right? So should you sell today?ДЄnswer: You don't know. The stock has doubled in value in the five years you've held it.

(The chart is real, drawn from Yahoo Finance, but the name of the stock, and the dates, have purposely been blanked out, because most people's first instinct will be to draw on historical knowledge to guess the outcome.) Let's say you wake up one morning, and this is the picture you see of a stock you've owned for about five years.

Obvious, though, is not the same as easy, because market timing, in essence, entails predicting whether the market will keep going the way it's going, or make a turn, up or down, which is easier said than done. The oldest investing advice in the book is вЂњbuy low and sell high.вЂќ Market timing is an attempt to do just that: Sell when the market is high buy when it's low. With this post, I hope to explain the issue and show how it applies to you, even if you never invest in a stock or mutual fund. Market timing is a topic of much discussion, primarily in the world of stock investing. InВ my previous post, a few commenters brought up the issue of market timing, generally taking me to task for appearing to advocate it.