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. Unfortunately, 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 outside the technology industry, in this example, you
are diversifying between asset categories. You need to do both.
*Diversifying your portfolio can be difficult*
It is difficult 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 small-cap market. In addition, you trade IWM like a
stock. Because of its high liquidity, it is easy, and relatively
inexpensive to trade into and out of IWM. This is a much easier way to
diversify, but it isn't the whole answer.
*How many ETFs are there?*
Ron Rowland is a widely-read contributor to SeekingAlpha.com. He wrote
an article titled "How many ETFs are there anyway?" In that article,
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 difficult to diversify your portfolio adequately. A
problem 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-balance 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 easier 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 hate
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 nearing 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 explain 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 easier to do if you employ 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 true primarily because the senior
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 portion of your money. Segregate a portion of
your portfolio and further diversify by following a market timing
system with that portion. Talk with your financial adviser and explain
that you want to try to take control of a reasonable portion of your
equity and trade broad-based ETFs.. History shows you can, indeed,
time the market. Some stock market timers do work well and provide
excellent returns over time.
Source: wd-gann.com
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