Market Timing & Individualized Investing

July 2nd, 2020 by Tanner Wrisley

The coronavirus pandemic has brought tremendous amounts of volatility to the stock market. The wild swings up and down have many investors wondering when they should deploy their money. But trying to time the market can be a tricky and dangerous game.

  • The general objective in the stock market is to buy low and sell high. You buy a stock hoping that later, someone will be willing to pay more for it than you did.
  • How do you know when a stock is “low” or has potential for appreciation?
  • And with the Dow Jones Industrial Average at around 26,000, is this a time to be buying or selling?

Unfortunately, no one can answer these questions with certainty. But, having a plan and being prepared is crucial to getting the most out of your money and wealth.
Having a plan can mean a number of things ranging from having a comprehensive financial plan, to knowing and understanding what goal you are investing towards.

  • For example, picture an individual in their mid-20s. They just got their first career job and started contributing to their 401k.
  • The money they are putting away in their 401k is for retirement and therefore will not be accessed for a very long time.
  • This individual should be heavily invested in the stock market in almost any market environment.
  • Say the market was cut in half and their 401k dropped significantly in value. Although it is certainly uncomfortable, they can withstand a market downturn because they will have plenty of time to stay invested for the ensuing bounce back.
  • For this individual, riding out a market correction is part of the plan.

Many other individuals do not have this luxury.

  • For example, picture an individual in their early-60s who plans on retiring next year and using their investment accounts for income to live off of.
  • Some of the money in that account will need to be liquidated and used imminently. This individual cannot wait for the market to rebound off a downturn because they will need to sell some of their stock next year.
  • If the market drops, they would have to “sell low” in order to meet their immediate cash flow needs. This is a situation investors want to avoid at all costs.
  • So, this person would need to have a decent amount of cash and fixed income to avoid catastrophic losses. And even though they won’t keep up with the stock market when times are good, the gains they are giving up are part of the plan.

In reality, only the riskiest investors with the longest time-horizons can attempt to “time” the market. And even they can still get burned by poor maneuvering.

  • For many investors, a good plan includes dollar-cost averaging into the market. This is where the investor takes small positions in the market over time, helping to minimize the affect of market timing.
  • Either way, it is important to have funds ready to go if a buying opportunity presents itself. Even if an individual doesn’t plan on buying all of their stocks on the first day the account is opened, it is usually a good idea to fully fund the account.
  • This way the money can be deployed as buying opportunities present themselves, while that money earns a little interest in fixed income or money markets along the way.

Anchor Bay employs dollar-cost averaging strategies for most accounts to help eliminate timing risk. Additionally, we like always like to “keep some powder dry” for those volatile days where we see temporary price drops in good stocks. Given that it is an election year, the corona virus getting a second wind, and the current social climate around the U.S., it is very difficult to say if stocks are “low” or “high” right now. With so many unknowns, this is a great time to make sure you are sticking to your plan and double check that your accounts are invested according to your individual objectives and risk tolerance. At Anchor Bay, this is something that we constantly scrutinize and keep at the forefront of our minds.