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Time The Stock Market!

Posted By Jim On 09/15/2008 @ 12:37 pm In Devil's Advocate | 12 Comments

Screw the experts, screw the planners, screw all those smart people who told you that you shouldn’t the time the market. Timing the market is the name of the game! Why wouldn’t you use all of the available information to your advantage? Why buy shares each and every month if the sky is falling? While I respect the thinking that the averages work out over the long run, reality is that no one lives in the long run and you can’t keep throwing good money after bad. If something is a bad investment, the experts say forget the sunk cost and cut loose. So if the stock market is a bad investment, why do they argue that you should keep investing when the smart money says you should take a break?

Before I argue why timing the market is smarter than buying like a mindless robot, let’s blow away the concept of an expert. Look at the dot-com boom, that was fueled by experts. The subsequent bust was nowhere on their radar. Experts do this day in and day out, you can’t tell me they don’t notice things going south. That means either you don’t want you to know because you’ll stop buying, which means they can’t be trusted, or they can’t tell, which means they’re incompetant. Or, the stock market is a bewildering creature that simply cannot be predicted (this is what I believe).

How about the housing boom? That was, in part, fueled by smart people figuring out they could collateralize garbage loans into safer loans so they could get their money out and lend some more. Boom, now the Feds have to assume control over Freddie Mac and Fannie Mae in order to calm the entire financial system and prevent a full-blown catastrophe.

Stock market and financial experts are like professional blackjack players. Sure, you can tweak the odds a little in your favor, but no one can see the future.

Use All Available Information

When people tell you not to “time the market,” they often mean that you should just buy slow and steady without any regard to what’s happening on the news. If you bought into an S&P 500 index fund anytime in the last few months, you had a stake in Freddie Mac and Fannie Mae (both of which were delisted last week because their market cap fell under the requirements). You bought into two companies (or “government sponsored entities”) that were in the middle of a housing crisis that we are basically chin deep in. There was talk that the companies would be taken over by the government, a move that would render their common stock shares worthless. If you bought into that index fund on a schedule, you bought into what appeared to be a sinking ship.

Experts would say to ignore that market news and just buy along as usual. I say that, in general, that should be the case but you have to use your brain here. We’re not in a scenario where some parts of the economy are doing well and others aren’t, we’re in a scenario where consumer spending is slowing and there are significant headwinds in the financial markets. Why not just take a break?

It’s Not The Only Game In Town

The stock market is one of the easiest ways to invest your money but it’s not the only way. You can take your money and invest it into a small business. You can go another easy route and buy some commodities like precious medals. You can buy art or horses or real estate. You could invest it in driving around to garage sales and looking for underpriced gems you can sell on eBay. The stock market isn’t the only thing you can invest in, consider other options. The more creative you get, the greater the potential gains.

Regular Contributions = Regular Commissions

There is one thing for certain every time you make a trade, the broker is going to take a cut. Whether it’s a load on a mutual fund, administrative fees, or a straight up commission – brokers make money on the action. When you make an investment decision, your choice might win or it might lose; brokers are fortunate, they always win. If people stop making contributions and stop buying stocks, brokers earn fewer commissions. Financial experts have a vested interest in telling you stay the course and that things will turn around (and they will, it’s just a matter of when).

Rule #1: Don’t Lose Money

At the end of the day, remember that rule #1 is that you shouldn’t lose money. Money that you don’t put into the stock market is money that you cannot lose. Put it into a high yield savings account [3] (WaMu has a 5% APY 12-month CD [4] No more! It’s now like 4% for 8 months.) so you don’t let inflation erode your purchasing power but staying on the sideline guarantees you don’t lose money. You may not earn a ton but you’re not going to lose a penny.

Timing the market is risky, but it’s certainly not as risky as blindly following “expert” advice.

(Photo: thecaucas [5], dsevilla [6])


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[3] high yield savings account: http://www.bargaineering.com/articles/top-5-online-banks-savings-or-checking-accounts.html

[4] WaMu has a 5% APY 12-month CD: http://www.bargaineering.com/articles/wamu-cd-rate-update-500-apy-12-month-cd.html

[5] thecaucas: http://www.flickr.com/photos/thecaucas/2262788821/sizes/m/

[6] dsevilla: http://www.flickr.com/photos/dsevilla/1910384749/sizes/m/

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