Time in the market
Let’s picture this: you are relatively satisfied with your position, but you begin to feel, read and hear everywhere about a bear market or recession more than likely. Everybody around you seems to agree. Kind of. What should you do?.
Maybe you should try to time the market and reduce risk by selling stocks and going to cash?
This is what is called timing the market: the illusion that you can anticipate (and benefit) before the market (or stocks) substantially change in price (up or down).
This is my definition, but let’s have a look at investopedia has to say:
Market timing is the act of moving investment money in or out of a financial market — or switching funds between asset classes — based on predictive methods.
I’d change the word act by art. Just a small gramatical change, but a change with huge consequences, because market timing is an art, and how many artists do you know? Fire some of them fast, I’m waiting: Leonardo Da Vinci, Goya, Dali, Van Gogh, Banksy … not that many great artist, right?.
Are you an artist? I bet you’re not. Neither am I.
Market timing is reacting before the market does. And I bring you bad news: it’s impossible. Not exactly impossible, but it is a game and gamble … or and art as stated before.
So what to do? Simple: Invest in great companies.
Great companies tend to increase in value over a long enough period of time and it doesn’t necessarily mean that long. In fact, 2 out of 3 years, the S&P 500 goes up. So, on average, if you keep yourself invested in periods of 3 years or more, you are ready to win. The longer you stay invested, the bigger the possibilities of winning.
It is true that when the market goes down, it does it faster than when it rises, with more pronounced falls, falls that scare you and play with your temper, but in the long term the trend is always up for great businesses.
Market goes down faster than it goes up, but overall it goes up more than it goes down
So look for great companies and keep investing in them … and do it periodically and without stopping:
Invest the percentage of your net worth which you feel comfortable. My percentage to invest directly in stocks is around 35% of my total personal wealth, but maybe it is too high. I recommend lower allocations and in fact as I’m writing this I will slowly transition toward a 20% ish.
And keep investing regardless of market conditions.
“The first rule of investing is to never interrupt it unnecessarily”. Charlie Munger
Always start small, with a 1% to 3% position in any single stock, and then keep investing and dollar cost averaging over several months or years.
Investopedia: Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals.
Not sure how to identify great companies? If you like, love and breathe investing you’ll eventually learn. If not, invest in very low-cost index funds. My main position is in low cost index funds and probably the best investment for 98% of the population.
You can buy Vanguard index funds. In Spain the best company for low cost index funds investing is Indexa Capital. They have the lowest rates and access to the best index funds. Let me know if you’d like an invitation with which both us benefit from an even greater reduction in rates.
Know more about Carles at www.carlescarrera.com
