The Money Honey: The Myth of Market Timing
Perhaps no other place do we hear more often the sad lament, “Oh, if only I had…” or “If I knew then what I know now…” than in the stock market. Why? Because in hindsight we see where we should have sold our stocks when the market took a turn downward, but we didn’t. We hung in there, thinking things were going to improve, hoping and praying, crossing our fingers, checking the Dow at the end of each market day in fearful anticipation that things have gone from bad to worse. You might remember those antacid days and nights and not ever want to repeat them.
Having gone through a market downturn like we’re experiencing now, many got burned with their stock portfolios and have vowed never to get into stocks again. And so they forsake what could be a long-term profitable investment opportunity for themselves because of the experience they have had recently. Many other people just keep pouring good money after bad, assuring themselves falsely that all will be well and that eventually they’ll make a profit.
What is a person to do in the midst of all of this craziness?
When you see a stock going down (or going up, for that matter), there are only three actions you can take: you can hold the stock and do nothing, you can buy more of the same stock, or you can sell it. If you hold it, that usually means you are in the stock for the long haul, so short-term rises or fallings don’t affect you. After all, a loss is only a loss (and a gain, a gain) in reality until you sell it; before that, it’s just a paper loss or gain. So holding on just means you’re riding the wave, either up or down, in the expectation that up will eventually be the direction.
You can buy more if the stock is down but you think it is going to recover, along with the market as a whole. This optimistic viewpoint has paid off because it ties into what is called “dollar cost averaging,” buying shares at one price, then buying more shares at a lower price, which brings your average price down, so that when the stock does go up, you have more profit. This only works, of course, when the stock does in fact go back up.
Lastly, the stock can become such an albatross around your neck that the only way you know you’re going to sleep soundly at night is to sell it off. Do so without hesitation if it means the difference between peace of mind or none in your life. Know your own tolerance for risk, and live within that tolerance level.
You control your stocks, remember, not the other way around. Look at all the stocks in your portfolio and decide rationally and unemotionally what you want to do with each and every one on an individual basis. You’ll be glad you did.