Why You Should Never Try to Time the Market
Many investors are struggling to make sense of current market conditions. That’s normal… but not the goal.
The goal should be to make money. But trying to time the market is actually a mistake investors make during volatile times. Instead, we’ll show you the three steps every investor can take to profit during volatile times.
Currently, volatility has jumped to levels last seen during the 2008 financial crisis, and stocks had their first correction in two years.
Now, traders are going to try to take advantage of higher volatility to book short-term profits, and that means being strategic about the timing of trades.
But investors take the long view, and for them, timing the market just doesn’t work.
Nobody knows when the stock market will peak or bottom. Trying to time those events often leads investors to panic-sell after the peak as stocks are going down, or chase higher prices to buy climbing stocks after they rebound.
For example, this month, Nvidia Corp. (Nasdaq: NVDA) fell 14.1%, from $248 to $213, in just five trading days. But then, two days later, the stock was back up 8.9% to $232.
Investors who sold at $213 in panic realized the 14.1% loss and missed out on the 8.9% rebound if they didn’t immediately jump back in.
The result of this natural human tendency can cost you gains you’ve already made as well as potential profits.
That’s why, today, we’ll show you our triple-pronged action plan to take emotions out of the equation (in order of priority).
Secure the profits you already have, protect your capital by avoiding unnecessary risks, and use weakness to add to your core holdings.
We’ll go over these three strategies in more detail in just a moment.
However, it’s important to remember that this action plan only works with stocks that fall under one of Money Morning Chief Investment Strategist Keith Fitz-Gerald’s “Unstoppable Trends.”
These trends are: demographics, scarcity/allocation, medicine, energy, technology, and defense.
They’re backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.
Stocks of companies that operate within one of these six trends are in high-demand industries that provide the fundamental underpinning of today’s global economic growth.
The stocks leading these trends are some of the fastest-growing and most dependable investments out there today.
Now, before you go out and buy one of those stocks, let’s go over how to secure the profits you’ve already made…
Avoid Trying to Time the Market, Add Trailing Stops to Protect Your Profits
Consider this common investing scenario. You purchased shares of Apple Inc. (Nasdaq: AAPL) back in January 2016, when they were trading at about $97, after Fitz-Gerald issued a “buy” alert to subscribers. So far so good.
Fast-forward to November 2017, and those shares climbed 80% to $174.50. An impressive gain, to be sure.
Around this time, prognosticators really started pushing the idea that the stock market was overvalued and due for a correction.
Investor uncertainty started increasing, but Fitz-Gerald was still bullish on Apple, and a 100% return was in sight.
That’s where trailing stops come in.
Trailing stops allow you to simultaneously protect the gains you already have while still allowing you to capture the potential 20% upside.
Fitz-Gerald often calls for 25% trailing stops.
What that means is placing a stop-loss order on your shares at a price 25% below the stock’s current price.
So if the price of AAPL stock fell to $130.88 (25% below $174.50), your broker would automatically sell your AAPL shares at the stop-loss price of $157, for a return of 34.9%.
Trailing stops help you protect your profits without worrying about how far the market will fall.
That’s a much better situation to be in than feeling forced to make a decision to buy or sell based on your emotions.
Because once emotions start guiding your decisions, you open yourself up to a chain reaction of poor choices.
Related: Has 2018’s Market Already Peaked? See Why History Suggests Yes.
Making Money Can Be Simple as Not Losing It
If stocks falls 10% but your brokerage account is entirely cash, then you outperformed the market.
Making more money is great. But avoiding losses can be even better.
If you don’t have a clear action plan and trailing stops to protect you from downside, you can fall victim to emotionally driven decisions.
For example, there’s a common gambling fallacy that if you lose $100 when you’re trying to make $100, all you need to do is make $200 the next time around to get back on track.
In reality, to make twice the profit (all things constant), you must double your risk.
Just like in blackjack, you don’t double down just because you lost the last hand. You only double down when the odds are in your favor.
In the stock market, losing money can trigger an emotional reaction to make that money back.
But that’s merely a way to take on unnecessary risks that can cause you to lose even more money.
Instead, commit to a post-correction buying plan BEFORE the correction happens by having a “shopping list” of strong stocks you’d like to buy at a discount…
Make a Shopping List and Buy Stocks On Sale
You may be familiar with the advice “don’t throw more money at a losing position.”
But a stock that’s up 80% in less than two years, which then dips 10%, isn’t a losing position.
Sure, you might have gotten stopped out of a position, but now you have more money than you did when you started.
That’s why Fitz-Gerald says to take stock price weakness as an opportunity to buy stocks on your “shopping list” at a discount.
Your “shopping list” should consist of fundamentally strong companies that fall under one of Fitz-Gerald’s six Unstoppable Trends.
If the stock market corrects, and the price of stocks on your list falls, then you have the opportunity to buy high-quality stocks at a discount.
This can boost your profits in three ways. First, you’ll have more shares. Second, the average cost of your shares will decrease. Third, if the stock pays a dividend, having more shares increases the size of your dividend income.
Even with an action plan in place, sudden stock market corrections can be scary.
Having a plan and following through with it can help you make better investing decisions by switching your attention to the strategy you’ve already set forth.
Save the emotions for Valentine’s Day, and leave them out of your investing decisions.
*This has been a guest post by Money Morning*