All great truths begin as blasphemiesWhenever I raise the topic of “market timing” I’m inundated with emails… many of which seem to accuse me of blasphemy. And, for the most part, I understand the basis of their criticisms. You see, market timing is often understood as PREDICTING future market price movements… and if this is the case, then I too have some major concerns. I’ve yet to meet the individual who is in possession of that illusive crystal ball.
Yet, when we shift our thinking away from predicting future market price movements and redefine market timing as preparing for future market price movements, then we have shifted from blasphemy to salient truths. Today, we’ll examine some of the evidence… of how timing the market makes a real difference to the bottom line of your investment portfolio.
Buying a Stock at the Right Time
At Invest in the Markets, we’ve created a principle we refer to as “buy the rise.” Essentially, this means we only buy into a new position as it rises… not as it is falling. This principle helps meet the overall criteria of protecting capital, minimizing risk, and maximizing returns. The tendency for some investors is to buy a stock when the share price is at a “discount” from it’s recent levels. Unfortunately, some of those stock prices simply continue to decline… and in some rare cases, even lead to the dissolving of the company. Therefore, if you’re buying more shares as the stock price falls, you’re gambling with your capital as you unnecessarily increase your risk.
Let’s take a look at a few stocks to see if timing the purchase and sale of the stocks would make a real difference in your portfolio. For the sake of consistency, we’ll use the same dates for each of these examples.
First, let’s look at a well known Blue Chip stock General Electric (GE).
- Purchase on January 1st, 2000 @ $50.95 and hold to today @ $19.22. The result is a 62% loss.
- Purchase on January 1st, 2000 @ $50.95 and sell on January 1, 2001 @ $50.88. The result is a 0.1% loss.
- Purchase on January 1st, 2009 @ $16.51 and hold to today @ $19.22. The result is a 16% gain.
- Purchase on April 1st, 2012 @ $20.03 and hold to today @ $19.20. The result is a 4% loss.
Next, let’s take a once well-loved Canadian darling Research in Motion (RIM.TO or RIMM – We’ll use the USD exchange).
- Purchase on January 1st, 2000 @ $8.50 and hold to today @ $10.88. The result is a 28% gain.
- Purchase on January 1st, 2000 @ $8.50 and sell on January 1, 2001 @ $12.57. The result is a 48% gain.
- Purchase on January 1st, 2009 @ $40.71 and hold to today @ $10.88. The result is a 73% loss.
- Purchase on April 1st, 2012 @ $14.65 and hold to today @ $11.19. The result is a 24% loss.
So we don’t make too much of this exercise, let’s look at one more… McDonalds (MCD).
- Purchase on January 1st, 2000 @ $39.94 and hold to today @ $87.75. The result is a 120% gain.
- Purchase on January 1st, 2000 @ $39.94 and sell on January 1, 2001 @ $33.81. The result is a 15% loss.
- Purchase on January 1st, 2009 @ $62.38 and hold to today @ $87.75. The result is a 41% gain.
- Purchase on April 1st, 2012 @ $97.88 and hold to today @ $87.75. The result is a 10% loss.
This is a very simple and all to abbreviated example of how buying and selling a stock at a specific time makes a tremendous difference in the profitability of your investment portfolio. In fact, you could do the same exercise… by simply choosing on paper in advance several random dates for buying and selling any given stock… and then go to the charts and test it against various stocks.
What’s interesting is that not only is it important to buy the rise, but it is as equally important to sell the dips and put profits in your pockets. What’s the point in holding a stock that has risen 15% only to watch those profits erode with the markets to the point you find yourself with a negative return on your investment. Yet some would, perhaps even you would, condemn the notion of “timing” yet when you buy and sell a stock is clearly a significant factor in your success as an investor.
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen todaySo, before we rush to declare market timing “blasphemy,” let’s pause for a moment and reflect on what it is that we’re really talking about. No, we’re not advocating “predicting” market direction… for prediction seems to be the fools arena to play in. What we’re championing is preparation and active investing. Not a knee-jerk “day-trading” scenario either, where you need to be fixated in front of your computer… but, rather, a measured approach, taking as little as one minute per evening per investment.
Since we don’t know what will happen with a given stock or overall market trends, we alleviate the frustration many investors face by checking our emotions and predictions at the door as we prepare our portfolios for whatever the future may present by following a proven strategy of preparation and active investing. We work for hours a week and years of our lives to earn the money we are now using to invest… so let’s not throw it away by taking a gamble that it will all work out in the end.
Market timing can make a real difference in your investment portfolio if your approach it not as a game of predictions, but as a discipline of preparations.