Can you buy or sell the market at the appropriate time? Can you choose
the right time to get bullish or the time to go bearish with your
trades? Financial advisers have been warning investors that you should
NOT try to time the market. They say it isn't possible. They recommend
instead that you diversify your holdings into different categories:
stocks, bonds, cash, real estate, precious metals, commodities, for
example.
*Why you should diversify?*
If you diversify your holdings, you will limit your losses - if you
pick the right investments. Sorry to say, you will also reduce your
gains. You will also reduce the volatility and variability of your
returns. You need to include enough risk or you won't earn enough to
reach your goal.
A diversified portfolio should be diversified at two levels: between
asset categories and within asset categories. For example, you are not
diversified if you own five different stocks in the technology
industry. (That is diversification within an asset category.) Since
all five stocks are in the same industry, you would be better buying
perhaps ten stocks in the technology industry, and another ten stocks
in a completely unrelated industry, such as the food industry. When
you buy stocks further than the technology industry, in this example,
you are diversifying between asset categories. You need to do both.
*Diversifying your portfolio can be hard*
It is hard to adequately diversify, so many financial advisers have
been employing the use of ETFs (Exchange Traded Funds). ETFs such as
IWM, which represents the Russell 2000, enables an investor to buy a
broad slice of the stock market - that is diversifying over 2000
stocks over a tiny-cap market. In addition, you trade IWM like a
stock. Because of its high liquidity, it is simple, and relatively
inexpensive to trade into and out of IWM. This is a much simpler way
to diversify, but it isn't the whole resolution.
*How many ETFs are there?*
Ron Rowland is a widely-read contributor to SeekingAlpha.com. He wrote
an condition titled "How many ETFs are there anyway?" In that
condition, which he wrote near the end of 2008, he estimates that
there are approximately 845 ETFs. By choosing among those various
ETFs, it should be less hard to diversify your portfolio adequately. A
conundrum with many of those ETFs is that they are not highly liquid,
and therefore, are expensive to trade.
*Buy low, sell high*
Of course we want to buy low and sell high. That is timing the market.
Financial advisers suggest that you should re-weigh your portfolio
every six-months or year. You should look to sell any of the holdings
that show profits, and buy sectors of the market that are beaten down.
This is a simple, somewhat effective way of timing the market.
*You take profits on your winners.*
This is simpler said than done. People tend to want to hold on to
their winners, but many times, the winners get out of favor, and turn
into losers. People tend to want to hold on to their losers, too. They
despise to take a loss. This re-balancing is essentially a way to time
the market, but many people cannot do it.
*Take on more risk*
You need to take on some risk, or your portfolio will not grow.
Depending on your investment horizon, the younger you are, the more
risk you can take on. An investor looming retirement should be more
cautious. For example, if you look at the buy and hold results over
the past 10 years, you will see that you would have lost about 27% of
your money. For a young investor, this is not devastating, but for an
older investor it is. The buy and hold strategy is not an effective
way of timing the market. There have been many articles give reasons
for why this is an ineffective way to invest.
*Another solution to consider*
As we discussed above, it is advisable that you diversify your
holdings. It is simpler to do if you use the use of ETFs. We also
discussed that you must take on some risk, or you won't grow your
portfolio. Most people approaching retirement, don't have enough
income to retire on. This is right primarily because the older
investors don't take on enough risk.
It makes sense to follow one or more of the many market timers offered
on the internet with a part of your money. Segregate a part of your
portfolio and further diversify by following a market timing system
with that part. Talk with your financial adviser and give reasons for
that you want to try to take control of a reasonable part of your
equity and trade broad-based ETFs.. Description shows you can, indeed,
time the market. Some stock market timers do work well and provide
brilliant returns over time.
Source: wd-gann.com
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