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Topic: Daily Advice

Stock trading advice: Beware of the risks of market timing

Risks of market timing - stock image

You might call it fair-weather investing. Many investors prefer to buy stocks only when economic and financial conditions seem good, if not ideal. When there’s news of rising oil prices or interest rates, for instance, they are inclined to stay out of the market, or get out if they’re already in.

Yet when they think conditions are ripe, these “fair-weather” investors can be surprisingly casual about what they buy. They readily accept recommendations from brokers, or they buy stocks that are touted by public-relations firms. They give promoters and insiders the benefit of the doubt.

You could say the strategy of these investors is highly sensitive to stock market timing risk, but relatively insensitive to investment-quality risk. This is pretty much the opposite of the approach we take with our stock trading advice.

Losses can mount up with stock market timing

When it comes to stock trading advice, we don’t put much emphasis on market timing risk. That’s because you can never get away from market risk, and it can cost you money to try. If you only buy when it seems market risk is low, you’ll wind up paying top prices (even though prices may and probably will eventually exceed what you paid.)

How Successful Investors Get RICH

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If you compound the error by selling whenever you think market risk has gone up, then you’re going to sell near market lows.

Up to a point, you might say we give the market outlook the benefit of the doubt. Stock market investors have to accept the constant risk that unforeseen events — unrest in the Middle East, a terrorist attack or even a spike in interest rates — may come at any time. You can’t predict when these events will take place. For that matter, you have no way to tell if an unpleasant surprise is a solitary event or the first in a series.

Of course we always have an opinion on the market outlook and we routinely share that opinion in our publications. Our market views do have some impact on our recommendations. That’s unavoidable. But our advice relies much more on investment quality and our five-sector approach to diversification.

Stock trading advice: Investment quality equals less risk

Opinions always differ about what constitutes a high-quality investment. However, if you invest mainly in well-established, dividend-paying companies, you’ll find that any investment or market timing mistakes you make will rarely cause serious or permanent losses. When you spread your money out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities), you’ll cut your vulnerability to market risk all the more.

In contrast, your market timing skills are bound to be crude and unreliable. They will never protect you from the risks of investing in companies with flawed business plans.

Moreover, even the best market-timing skills are useless when it comes to protecting you from untrustworthy insiders. If we have reason to doubt the integrity of a company’s insiders, we stay out, no matter how tempting it seems.

Those are the risks we focus on and attempt to avoid. The damage they can do to your finances makes political turmoil in the Middle East, interest-rate fluctuations and general market risk seem tame by comparison.

We try to help you reduce that risk when we make aggressive stock recommendations in our Stock Pickers Digest newsletter. Rather than relying on market timing, we aim to uncover undervalued stocks that will do well in both rising and falling markets.

If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 20 stocks that may be suitable for the part of your portfolio you devote to more aggressive stocks. What’s more, you can get this issue free. Click here to learn how.

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