The Dangers of Market Timing

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During times of stock market uncertainty, much emphasis is placed on market timing. For the long term investor, market timing is of little importance. A few dollars difference on the price of a stock plays little importance over the long run.

Timing is dangerous

Trying to time the market is inherently dangerous. It requires many different entry and exit points, while suggesting that everyday investors keep up with complex market events. Even the knowledgeable investor can have a hard time predicting bottoms. Forces such as stimulus packages and lower rates make bottom picking even more difficult. The focus should be put towards quality investments, rather than short term profit-taking. Quality companies will gain value over the long run, regardless of short term sentiment.

The world’s stock markets have been in a complete sell off. Even established companies with long histories of profits are being sold to protect investors from further drops. Take for example Toyota; even with a great history of beating expectations, the stock has been unable to avoid the sell off. When the markets drop, all stocks take a brief hit, even the most solid companies.

How the liquidity crunch can help

The liquidity crunch in the banking industry has provided a great chance to buy good companies for dirt cheap. Institutional investors have to sell positions to meet margin calls and cover their borrowed money. This creates an artificial selling pressure on companies, which can devalue even the best long term investments.

Value isn’t created by buying and selling in a matter of minutes. For most investors, the big money is in building a position in a quality company that will perform well in bear markets and perform even better in a bull market. Blue chip stocks will likely lead the rebound when equity flows back into the market and boosts share prices. Regardless of economic indicators and home sales, corporate earnings look the best they have in a number of years. Take a look at corporate giant Target, which sells at just 15 times next years earnings. For a retailer with 15% growth rates, it should be expected that the value of the company will grow when the economic indicators turn around.

Investors are selling just to sell

It appears that investors are selling positions based on gut feelings, rather than corporate balance sheets and overall fundamentals. With quality stocks losing 10-15% of their value just in the last 6 months, there is plenty of money to be made by building a position and selling into the upswing. This bear market has pushed companies values down, and the future bull run will bring them back up and more.

Bargain shop

Start searching through the stock market bargain bin to find solid, long term investments. There are many bargains in today’s market, especially in the technology and retail sectors, which have bit unfairly hit by large sell offs. Selling pressure is likely to be the greatest on companies that are held widely by firms; it is entirely possible that the best investments were sold off to generate quick cash than to take profits.

Start by purchasing monthly dollar amounts in quality companies; you’ll get today’s low price and continue to build a position well into the next bull run. With stock prices depressed, the best investments are likely to be found in dividend reinvestment pans, where the ridiculously high dividend yields will be reinvested into the companies stock. Stock prices have dropped, but their dividends haven’t – this opens up a great income producing possibility by tapping high yield stocks.

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