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Time in the market as opposed to timing the market
Dollar Cost Average (DCA)
Risk Management
The first thing to say is that there is no magic crystal ball regarding investing. Secondly, there is no scientific approach to correctly entering and exiting a position. And thirdly, you should always be cautious if someone claims to know precisely how to do it.
You certainly won’t get that from us as we neither have a crystal ball nor offer financial advice. However, we will use our knowledge and insight to offer 3 useful ways to try and avoid this unfortunate situation.
For those unfamiliar, buying high and selling low is an investment term that refers to buying something that is high in price and then selling it when it is lower. As most people tend to invest to make money, this approach is usually avoided like the plague.
Instead, the approach most investors like to take is to buy low and sell high so that a profit will be made. However, there come difficult times when you may have no choice but to sell at lower prices than you originally got in at.
There is a range of factors that determine which side of the fence investors end up on. In this blog, we will look at 3 examples that could help you be on the right side of the fence going forward (aka buying low and selling high).
Time in the market as opposed to timing the market
This is a common saying when it comes to investing. Just as Matthew McConaughey says in the film The Wolf of Wall Street, “nobody knows whether the stock market will go up, down, or in circles”. This is figuratively speaking, but the point remains that there is no guarantee of what will happen in the future.
In addition, there are thousands of books, charts, influencers, videos, and tips that may try and convince you that you can predict what will happen next. In reality, there is a certain level of unpredictability that not even Warren Buffett can foresee.
Therefore, the saying time in the market as opposed to timing the market is popularly used because it lowers the sense of unpredictability. For instance, what history has shown us is that over time, most stocks tend to increase in value. That said, it’s important to point out that this is not always the case.
The reasons for this are detailed and complicated, but if you would like a general overview, head over to our course and find out more about the history of money.
The fact investments are labelled as risky is because there are no guarantees. This goes for all investments e.g. a house, a job, an invention etc. That’s why time in the market is favoured over timing the market because the risk levels are even greater when the time period is smaller.
As always, we never tell people what to do and no one said you can’t make money trying to time the market. With that said, it’s important to remember that the past is not necessarily a helpful indicator of what will happen in the future.
Dollar Cost Average (DCA)
It’s an American term that refers to taking an average when it comes to investing your money.
What does that mean?
In simple terms, it is the opposite of trying to time the market. By Dollar Cost Averaging, you are accepting that you may buy something that is high at the time and also buy something that is low at the time.
The difference is that you spread out your purchases over a long period of time, which usually ends up giving you a happy medium.
Now, this is not necessarily a method to give you overnight success. Crucially, however, you’re also unlikely to lose money overnight. Whereas, if you try and time the market and then something bad was to happen, you run the risk of getting in trouble.
It’s a recommended approach for beginners or investors with a very small risk appetite. Moreover, you’re less likely to feel FOMO (Fear Of Missing Out) when it comes to making decisions because you have a plan set in place.
DCA tends to reduce the pressure of buying something high one week and low the next because you know, over time, it should average out in the end. As a result, you are more or less avoiding the buy high/low approach altogether.
Risk Management
You may come across the same old sayings and it may feel like a broken record. However, for the most part, they are a pretty helpful guide. Here are a few:
Invest for the long-term (5-10 years minimum)
Don’t invest more than you can afford to lose
No one went broke taking profits
Firstly, the reason behind the long-term approach to investing is largely related to point number one in the blog. The only way you can have greater reassurance and understanding of your investment is by spending time in the market.
Even Warren Buffet, who is one of the greatest investors of all time, does not make every decision a correct one. Despite that, the reason why Warren Buffet has been as successful as he is is down to the fact he has invested for the long term (since he was 11 years old!).
Secondly, not investing more than you can afford to lose should help you avoid buying high and selling low. As we have said, no one intends to make an investment, only to sell it for less in the future. But, if some people invest more than they can afford to lose and find themselves in a position where they can’t afford the basic needs, you have no choice but to sell.
Finally, the meaning behind “no one went broke taking profits” is that making money is never a bad thing. Importantly, it’s not saying you can never be broke. That will depend on your own circumstance. Instead, it is saying there is no harm in taking a profit if your investment has gone up.
Of course, taking profits can be difficult. It’s natural that when an investment goes up, we want to see it go higher and higher. That’s where greed can sometimes take over. Consequently, looking at taking profits every once in a while is never a bad thing because you will always avoid the problem of buying high and selling low.
In summary, risk management tends to play a large role when it comes to the side of the investing fence you sit on. The better your risk management, the better chance you have of avoiding buying high and selling low.
We hope you found this blog useful and interesting. If so, please let us know over on the community page! Don’t forget to check out one of the other blogs.