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Wednesday, August 22, 2012

Market Timing May Be Dangerous

Market timing may be the two most dangerous words in investing, especially when practiced by beginners.

Market timing is the strategy of attempting to predict future price movements through use of various fundamental and technical analysis tools.

The real benefit of knowing what is going to happen is that your return from buying a stock before it takes off is obviously better than if you have to buy the stock on its way up.

Buy Low, Sell High

Market timers are the ultimate “buy low and sell high” traders. Day traders, who move in and out of positions in minutes or hours, are the extreme market timers. They look for small profits by the dozens each day by capitalizing on swings in a stock’s price.

Most market timers operate on a longer time line, but may move in and out of a stock quickly if they perceive an opportunity.

There is some controversy about market timing. Many investors believe that over time you can’t successfully predict market movements. Market timing becomes more of a gamble in their opinion than a legitimate investing strategy.

Market Timers

Other investors argue that it is possible to spot situations where the market has over or under valued a stock. They use a variety of tools to help them predict when a stock is ready to break out of a trading range.

Unfortunately, stock prices do not always move for the most logical or easily predicable of reasons. An unexpected event can send a stock’s price up or down and you can’t predict those movements with charts.

The Internet stock bull market of the late 1990s was a good example of what happens when investors in the excitement of the moment, consciously or not, became market timers.

Next Big Thing

Every one had a hot tip about the next “big thing” and investors were jumping on stocks as they shot up. Unfortunately, most of these rockets came crashing down just as quickly and many investors held on way too long.

The disastrous result was an exact reversal of what they hoped. In the end, it was a case of “buying high and selling low.” You don’t need to know much about investing to know that’s not a successful strategy.

For most investors, the safer path is sticking to investing in solid, well-researched companies that fit their requirements for growth, earnings, income, and so on.

If you look for undervalued stocks, you may find one that is poised for moving up sharply given the right circumstances. This is a close to market timing as most investors should get.