Predicting and timing the markets is a dangerous thing. Some investors in the heat of the moment, consciously or not, became market timers and chase stocks up or sell them down. You don’t have to be a savvy financial whiz to know that’s not a successful approach.
It’s the reverse of the old buy low/sell high approach.
Last month the best-selling personal finance book was Suze Orman’s “2009 Action Plan: Keeping Your Money Safe & Sound.”
Just a year ago, however, one of the best-selling personal finance books of early 2008 was “Ready, Fire, Aim Zero to $100 Million in No Time Flat,” by Michael Masterson.
Orman’s book focuses on slumping financial markets and addresses the issues of asset safety, home ownership and retirement investments in light of recent huge changes in global finance over the past 18 months. Meanwhile, Masterson’s book was written back in October 2007 when the markets were reaching their 2007 highs and was published in January of 2008. He instructs readers on how to become an entrepreneurial self-made millionaire — just like him. And the title certainly implies it won’t take you very much time to do this.
Well here we are in 2009 and I dare not put in print what the market has been doing because it changes so rapidly. Behavioral finance and behavioral economics have a lot to do with the volatility in the markets. I’ve written about these “new” disciplines several times and to summarize they scientifically research social, cognitive and emotional factors in an attempt to better understand the economic decision making of consumers, borrowers, investors, and how this affects market prices, returns and the allocation of resources which brings back memories of Econ 201.
There’s even a trade journal for Behavioral Finance. According to The Wall Street Journal, back in 2006, two observers of the financial book publication scene determined that the market tends to perform better when there’s been an over-abundance of the gloom-and-doom books published. So it could be suggested that if everything you see in your favorite bookshop is bullish or bearish, it may be time to become a contrarian. Don’t lose sight however of the time frame for your goals and plan accordingly.
Dollar Cost Averaging (DCA) is an approach designed to lessen the risk of investing a large amount in a single investment at the wrong time. DCA makes it easy to get over the psychological barriers of investing in down markets when stocks are less expensive. Dipping your toe ever so gently into the stock market using a DCA-like strategy may or may not be appropriate for you. Ask questions of someone who is willing to take the time to evaluate your risk tolerance and needs.
For most investors this is as close to market timing as you should get.
Some of your cash needs are short-term, some are moderate and others are long-term. Design your portfolio to reflect those needs. “Healthy, wealthy and wise” is more than a cliché. Think of it as the formula for the good life to which all of us aspire.
Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145 provides this article. If you have questions please contact Darcie Guerin via e-mail at Darcie.Guerin@RaymondJames.com. Phone (239) 389-1041, toll free (866)-343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.