Market timing sounds so simple and elegant; however, I think it pays to remember that it takes not one, but two correct market calls to be successful at it. You’ll have to sell before the markets fall and buy before they rebound, which I can almost guarantee they will once the dust settles.
I’ll leave that to the professionals, thank you very much. But how do I know when to buy stocks?
Strategy 1: Save up a set amount each year, and buy once in bulk.
On paper, this stock investing strategy seems like it’s guaranteed to yield the highest return because you’d ideally be buying when prices are lowest every year, and letting your profits run through bullish trends.
But keep in mind that a strategy like this is easy to produce on paper because in hindsight, we already know when the lowest point was for each year. In the day-to-day, there’s no way you can know if the next day will bring a bull or bear move in the markets, much less whether it’s the top or bottom for the year.
Strategy 2: Buy a set dollar amount each month to average your cost basis.
This is probably the easiest stock investing strategy for a novice to get accustomed to a disciplined strategy. But it’s not the most lucrative, because by definition, “averaging in” means some months you’ll be buying when prices are overvalued, and some months you’ll be buying a bargain.
Strategy 3: Buy a set amount each month on the dips.
This strategy is another that sounds attractive on paper, but is also extremely difficult. Instead of buying the bottom once per year, you would have had to time the bottom 12 times in a year. But if you were successful in this unlikely scenario, here’s what it would have yielded.
So the numbers are clear — your returns wouldn’t have been that different if you tried to buy the lows each month or if you simply bought on the first trading day of the month. Strategy 1 would yield the highest return, with or without taking commissions into account.
Is it realistic to expect you can time the lows every month, or even every year? Of course not. But by saving up your money and planning a buy-under price you’re comfortable with, you have a lot more wiggle room to beat the market than you would by buying more frequently.
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