Market Timing: A Losing Game for Most Investors

Market Timing: A Losing Game for Most Investors

If we all knew the exact time to buy and the exact time to sell we’d all be rich and there’d be no point to talking about investing. Few people, if any can know exactly when to buy or sell with any degree of accuracy. Most investors get it completely wrong. Need proof?

If you analyze data from the Investment Company Institute (ICI) and look at the all time highs of the stock market (such as October 2007: Dow 14,000), you’ll see the greatest number of people buying and when you look at some of the lowest points of the market (such as March 2009: Dow 6,600), you’ll see the highest number of people selling. This confirms that most people buy high and sell low. This is the exact opposite of what they should be doing!

Let’s look at two investing traps that leading to buying high and selling low:

Investment Fads and Following the Crowd

Since 1990, we’ve seen investing fads come and go. In the 1990s it was technology stocks, followed by real estate, and then it became oil and gold, then emerging market countries. Today many flock to any form of green or environmental investing.

Investment fads are only in vogue until everybody knows about them. Once they become cocktail party conversation, financial magazine material, or an internet sensation, the fad is as good as dead on arrival.

Human nature drives people to invest in fads only after prices have already risen. This means those late to the game are the most apt to get hurt. We only hear about a trend after people have already been successful making it less and less likely that you can follow their success. Instead, you need to figure out how to buy low and sell high. Here’s a hint: investing in fads is not the way.

Falling for the Media Madness

Money magazine, Fortune, USA Today, CNBC’s Jim Cramer, Forbes, you name it, they are all there to entertain! Let me repeat this they are all there to entertain. This means sell you something! If you don’t tune in, buy from their advertisers, and continue to frequent them regularly, they go out of business. Bold headlines, irrational advice, entertaining news, sensationalized stories…it must capture your attention.

How poor is the advice from the media? In 2000, Case Western Reserve University conducted a study showing that investors who follow media recommendations lose 3.8% of their money in the following six months after the recommendation. So why do so many people blindly follow the media’s investment advice? Predictions made about sports, weather, and Wall Street make good conversation pieces, but poor investment strategies!

Making wise investing decisions is not rocket science, but it does take time to gain some basic knowledge and the fortitude to against human nature by avoiding the media blitz and following the crowd. Avoiding these investing traps will put you on a more secure path to future financial freedom.

If you would like assistance developing and sticking with a long term plan , talk to a qualified financial advisor today.