Jump in the market stock at the wrong time and you might face a loss of 12% in 24 hours
It’s not surprising that first-time investors often worry about the timing of their initial stock purchases
Now a day, the global economy is more interconnected than ever, in fact, you will notice a global trend of boom and bust in any market stocks over the years.
Most money websites and so-called “expert”, will preach about investing a small amount of money every month over an extended period, so you average out the up and down of the market stock. For the average investors that are happy to invest in ETF or funds might work, but what about the investors with a lump sum of money?
You might just have sold a house or heritage some money, and you are puzzled about timing investing in the stock market.
So, what is my opinion about buying on your first share?
Time is on your side
I firmly believe and suggest you to invest your money in stocks for the long run. Over the long haul, the compounding returns of a well-chosen investment will add up nicely, whatever the market happens to be doing when you buy your first shares.
Investors that try to time the market, buying and selling stocks often, are setting them self up for losing money in the stock market.
What drives stock prices up is ultimately profit. In a downturn moment, solid companies with excellent profit prospect will not lose much during the hard times, and in the long run, the share price will go up and up.
So, the first rule is to buy shares of profitable companies. Avoid any start up or corporations popular at the moment, instead, use fundamental analysis to choose the right stock.
Here the email I got from a retired man:
“I’ve been on the sideline as the market went up in recent years, from 2009. My money is sitting in a saving account producing nothing, but I’m afraid to buy the stock at the top and lose big.
Should I invest now or wait for a crash to get into the stock market?”
Timing the market stock is impossible, no one knows where the market is heading. It is like guessing the next numbers for the lottery, it is a gamble, and you shouldn’t gamble with your savings.
But there are patterns over the years, and before we have seen sudden declines in the stock market up to even 16%, before turning around and reach a new height. That doesn’t mean another surge will follow the next downturn.
The fact is, while we know this bull market will end at some point, no one knows when that day will come.
My advice is, develop a strategy that allows you to reap the reward in the long run weathering the up and down of the market stock, so the best time to invest is now little and more tomorrow when the market correct.
Change of Price Create Opportunity
Value investors have few opportunities to buy share during a period of corrections every year. From my analysis and experience, I have identified in average between one up to three times per year occurrences that offer entry points to investors.
The important question is: “How to identify a buying opportunity in the stock market?”
The sudden drop in the market stock for most shares is causing by internal and external factors.
Internal factors are related to the country economic and social condition. For example, a terrorist attack or export figures down can cause the stocks to drop immediately.
I would say, any bad news about the internal economic condition are an alarming bell for investors, and in this case, I would stay away from the stock market.
Instead, the benign “bad news” are for example a terrorist attack in the country, a storm, a flood or any social/political bad news coming from other nations that aren’t partner with the country you invest in.
The negative news will cause a correction in the stock market that has nothing to do with the economic fundamentals of the country and companies listed on the stock market exchange.
External factors are related to foreign affairs, foreign stock market and other nations. Because the world is interconnected and the speed of news is fast, your local market stock gets affected by the major international crisis.
An example these days is the slowdown in China with a massive sell off on the Shanghai exchange, spreading worries to investors in other markets and ultimately affecting their market stock. Negative news must be taken into consideration, even if you are investing in the another side of the globe.
An external factor like a war in some middle east country usually isn’t going to affect your investments.
In this case, I add shares to my portfolio. This is called trading stocks – buying and selling.
The important principle here is to exploit the mismatches what people think the stock is worth now and are willing to pay in near future. You want to buy stocks at the low price and sell it in the future at higher price getting a profit.
Who first have the information makes the money, and it isn’t you.
News that aren’t useful to you are:
- The announcement about a business; losing legal challenges, releasing earnings or new patents.
- Technical issues related to the administration of the stock; buyback, split, mergers, corporate offers.
I mention earlier these information will be irrelevant to you because you will be the last person to know, and the last person is always losing money. Before you, there are executives in the company, major shareholders, employees, brokers, professional traders and so on.
The news beneficial to you is:
- Broader market trends; fears of economic news, annual selloff, and slowdown, political events, crisis.
This type of news create panic, and during panic times, everyone is selling stocks. These corrections offer the greatest opportunities for you to get invested in companies with excellent fundamentals.
So, here the important lesson;
~ Buy on the correction of stock prices related to fears of economic news
~ Buy stocks with strong fundamentals.
Keep a Reserve of Cash Just in Case
The market is crashing for few months, and it looks sexy, it is time to buy. That is great, you should get in with a long-term view about your investments, but wait, don’t pull in all your eggs.
Read the investment lesson of 1937; hold some cash, it isn’t just another story but history. The main point of this article that caught my attention is this:
“During boom times, cash often is viewed as a drag on one’s wealth, earning measly interest while stocks surge. After stocks fall, it becomes clear how valuable it is.”
Over my investing years, this dilemma is a monthly struggle while doing my personal accounting. I check every month my financial situation and how money is working for me. Too much cash during the market boom makes me think that I’m losing an opportunity of gain but during the bad time, I say to myself “likely have some cash on the side to buy some more stock”.
Too much cash during the market boom makes me think that I’m losing an opportunity of gain but during the bad time, I say to myself “likely have some cash on the side to buy some more stock”.
So, in your initial market stock investment, hold at least 30% in cash or bond which are an excellent defensive strategy to take advantage of future declines and weather bad times. You will feel more confident in holding your shares during the turmoil.
I usually start to use my reserve of cash when the stock pulls back above 10% from a recent high, with regular weekly purchase as the stock goes down. When the market turn around, going up constantly for two weeks, I stop my buy frenzy and hold the investments for at least one month.
From there, I decide if I should start to sell some shares weekly to get back to my original position of 30% cash or keep invested in the market for the bull run.
This system has been profitable over the years, taking advantage of the up and down of the market stock.
How long corrections/recessions last
Stock can go down from a minimum of 2 weeks up to 80 weeks looking at historical trends excluding the great depression.
In the above chart, we can see during the recession time the decline last longer with small correction between the years. In the last 20 years, recessions happen less often than in the previous century, indicating the FED have done an excellent job with monetary policies.
In the last 10 years, the stock market hasn’t grown match because of low inflation and low GDP, instead, in the eighties and nineties, the stock had a good run because of a booming economy.
“I believe the next recession will last long, between one to two years.”
We had an unprecedented monetary easing, this will exaggerate the next downturn.
These are my three golden rules to choose the right time to invest in the market stock. I didn’t talk about analyzing the companies, select high-value stocks because it will be entirely for another article.
I would love to hear your thoughts, please write them below and let’s discuss.