A 20% return on investment is considered a very good return if it was consistent, however, a 100% return is possible and very realistic if you managed to buy at the bottom of a bear market.
At bear markets stocks are battered to the extent that they sell to very big discounts from their original value. If you managed to buy at the bottom, you will make very generous returns, and you may not need to do any further steps rather than watching your portfolio grow in value every day for years.
How to know it's the bottom
First of all you have to know that determining the exact bottom is not possible but instead you can know that you are close to the bottom (see my article determining the stock market bottom). Buying close to the bottom will bring you very generous returns; you just have to look for some signs that can tell you that the market is close to the bottom. The following are the signs that can help you know that stocks are trading near to the bottom:
* Bad news have no effect:The market always reacts to bad news by going down but when bad news are released and the market doesn't move or responds with very small reactions then know that stocks won't go down any further
* The market moves sideways: The market never reverses its direction before moving sideways for a few days or even weeks.
* All bad news are discounted in price: When all of the bad news are discounted in the stocks this means that the market is about to start its journey up. For example, if the market went down 20% in one week as a reaction to an announced recession, then what else can bring the market down? The recession which is the worst news has already been discounted in price. If however, new news are being released everyday then you might want to be patient before the news is over.
* Avoid the trap: Just like the sun rises from the east the market moves up after significant drops, if the market went down 20% it must go up 5% in the next two, tree days, or even the next week. Some people confuse this and think that it's the next bull market but few days later they lose the gains they made. In order not to fall in this trap make sure that the market moved side ways before it moved up
Saturday, November 1, 2008
Remember Investing is About Profiting - Tip - Invest Not Restrict
People are always asking me which stock to buy, or which sector is hot right now for them to jump into. Questions like that usually make me laugh a little to myself, because even though investing is in part about what is "hot" (an investment must increase in value to benefit you), it is mainly value in relation to what people are paying for something now versus what they might pay for it later.
For the most part I put people on a safe path towards a desired yearly return with an acceptable risk level based on their comfort level and financial goals. However, I am constantly reminding people that investing is about profiting, so why are they limiting themselves to just one market.
Everyone knows something: a hobby, a trade, a skill, a way of life. However, not many people have the confidence to pursue this type of investment. Alternative as it might be, sometimes the best investment for people is not the stock market, but in a carefully laid out investment in themselves.
It's no secret that one of the most profitable investments is starting a business. There's an old saying "Those with wealth invest, those with knowledge create." People usually find themselves on either end of the spectrum, some even in the middle. The point is, why are you not investing in one of the best vehicles for your dollar?
The sad fact is that most people either do not have the drive to motivate themselves to start a business or lack the knowledge in the field of business they wish to enter. True, starting a business can be a daunting task, capable of sucking away most of your time. Estimates range that a new business owner's weekly workload can average around 50-70hrs, leaving little time for social events or anything else that is not properly time managed correctly. This leads to the fact that 80% of new businesses fail within their first year of operation.
If 80% of new businesses fail in their first year, then why is it a good investment? Simple, one net worth can grow tax deferred (or tax free in some cases) a multiple of times within a very short period of time. It's like picking a stock at $1, and having it go to $20, but you're in control of how high it can go. Most businesses fail due to poor planning, time constraints, or even a business owner trying to tackle everything on their own and not having enough time to effectively handle even one part of their business correctly. Stress, financial strain, legal matters, taxes, employees, are among other things that can bog down a business in the beginning.
With most investments, more reward means more risk, but with a business, the risk is usually limited because you control it. You decide each move, each play, and as such control the outcome of your investment return; the trade off is that you must make each decision not someone else. With a business, you are trading the ability to make more by correctly leveraging off of yourself and other people (employees), versus making a limited or lesser amount by "correctly" selecting the best company to "invest" in. Too often people have gotten burned in the market because even though they did the correct due diligence on a company and found a sound investment, the market "reacted" differently than what made fundamental sense. The end result is a loss when you should have had a win. With a business, you decide, because the health (net worth) of your business is directly related to the fundamental factors affecting it, not by the rapid selling of trust funds, or liquidating board's members with enormous option packages to cash in.
Just remember that if done correctly, starting a new business can become a well oiled-machine. Providing a continual net worth increase and making your every dream become a reality, being only limited by our drive and imagination. The wealth that can be ascertained with a business is comparable by few other investments making it a worthwhile venture to consider.
For the most part I put people on a safe path towards a desired yearly return with an acceptable risk level based on their comfort level and financial goals. However, I am constantly reminding people that investing is about profiting, so why are they limiting themselves to just one market.
Everyone knows something: a hobby, a trade, a skill, a way of life. However, not many people have the confidence to pursue this type of investment. Alternative as it might be, sometimes the best investment for people is not the stock market, but in a carefully laid out investment in themselves.
It's no secret that one of the most profitable investments is starting a business. There's an old saying "Those with wealth invest, those with knowledge create." People usually find themselves on either end of the spectrum, some even in the middle. The point is, why are you not investing in one of the best vehicles for your dollar?
The sad fact is that most people either do not have the drive to motivate themselves to start a business or lack the knowledge in the field of business they wish to enter. True, starting a business can be a daunting task, capable of sucking away most of your time. Estimates range that a new business owner's weekly workload can average around 50-70hrs, leaving little time for social events or anything else that is not properly time managed correctly. This leads to the fact that 80% of new businesses fail within their first year of operation.
If 80% of new businesses fail in their first year, then why is it a good investment? Simple, one net worth can grow tax deferred (or tax free in some cases) a multiple of times within a very short period of time. It's like picking a stock at $1, and having it go to $20, but you're in control of how high it can go. Most businesses fail due to poor planning, time constraints, or even a business owner trying to tackle everything on their own and not having enough time to effectively handle even one part of their business correctly. Stress, financial strain, legal matters, taxes, employees, are among other things that can bog down a business in the beginning.
With most investments, more reward means more risk, but with a business, the risk is usually limited because you control it. You decide each move, each play, and as such control the outcome of your investment return; the trade off is that you must make each decision not someone else. With a business, you are trading the ability to make more by correctly leveraging off of yourself and other people (employees), versus making a limited or lesser amount by "correctly" selecting the best company to "invest" in. Too often people have gotten burned in the market because even though they did the correct due diligence on a company and found a sound investment, the market "reacted" differently than what made fundamental sense. The end result is a loss when you should have had a win. With a business, you decide, because the health (net worth) of your business is directly related to the fundamental factors affecting it, not by the rapid selling of trust funds, or liquidating board's members with enormous option packages to cash in.
Just remember that if done correctly, starting a new business can become a well oiled-machine. Providing a continual net worth increase and making your every dream become a reality, being only limited by our drive and imagination. The wealth that can be ascertained with a business is comparable by few other investments making it a worthwhile venture to consider.
Online Trading Strategies - Be Logical and Careful
Online trading has become a norm rather than an exception. Now every trade is going online. Online trading requires sharp mind, information and action. Since, it is an online trading, you have to be really careful. Stock trading is now also done online. Since it involves huge investments by the already rich as well investments made by needy people who are seeking some additional income, there is a need for every one to devise some online trading strategies.
Stock trading is a process that involves buying and selling of stocks online with the help of stock brokers. The mercurial and volatile nature of stock markets warrants that you need to strategise every decision you make concerning stock buying and selling. Those who are novice in stock trading, it becomes even more essential to tread with caution and follow certain stock trading strategies.
One of the very important online trading strategies is to take position in an issue that is moving. Taking a position in an issue that is not progressing or moving in any direction is waste of money and time.
In traditional trading of stocks, generally a call is made to a broker, instructing him or her which stock you want to buy or sell. But now online trading strategies have changed. The Internet has made things simpler and you can trade in stocks using your own discretion. But a reliable broker is a must also. Then what trading strategies to follow to get hold of a trustworthy broker is the next question that comes to mind?
Though, there is no dearth of brokers that you can select from, you need to make sure that you find one who has sound financial backup and desired experience in this field. Be vigilant and look for a broker that possesses huge assets because you do not want your broker to file for bankruptcy.
Online trading strategies warrant that you should ask for information from leading brokerage agencies. You can ask them what minimum amount is needed to start trading and whether you will have to shell put some money for inactivity. You can also ask them what are their commission charges. One of the most logical online trading strategies is to trade in stocks with discipline and with a plan.
Stock trading is a process that involves buying and selling of stocks online with the help of stock brokers. The mercurial and volatile nature of stock markets warrants that you need to strategise every decision you make concerning stock buying and selling. Those who are novice in stock trading, it becomes even more essential to tread with caution and follow certain stock trading strategies.
One of the very important online trading strategies is to take position in an issue that is moving. Taking a position in an issue that is not progressing or moving in any direction is waste of money and time.
In traditional trading of stocks, generally a call is made to a broker, instructing him or her which stock you want to buy or sell. But now online trading strategies have changed. The Internet has made things simpler and you can trade in stocks using your own discretion. But a reliable broker is a must also. Then what trading strategies to follow to get hold of a trustworthy broker is the next question that comes to mind?
Though, there is no dearth of brokers that you can select from, you need to make sure that you find one who has sound financial backup and desired experience in this field. Be vigilant and look for a broker that possesses huge assets because you do not want your broker to file for bankruptcy.
Online trading strategies warrant that you should ask for information from leading brokerage agencies. You can ask them what minimum amount is needed to start trading and whether you will have to shell put some money for inactivity. You can also ask them what are their commission charges. One of the most logical online trading strategies is to trade in stocks with discipline and with a plan.
Trading and Its New Form - Online Trading Comparison
Online trading communities carry out the functions of online trading comparison. Do you know that these comparison is helping many new investors and traders in all over the world? There is no exception, why you would not be aware of this. Hope you would be definitely aware of it. People can make use of these trading communities as well as their various online trading comparison to get a clear picture of the current stock market. This comparison helps in facing the most volatile status of the stock market. Get the membership of a good stock or online trading community and you will be knowing how online trading comparison helps in developing active trading skills.
The concept of online trading comparison has been very successful in the current world. Such kind of comparison is helping people to used their money for investing it in the global economy. The surveys on the global economy show that people these days do not like to keep their hard earned money in the banks. They are just moving towards the investment banks. How these people have come to know about these investment banks. This is only done by various online trading communities. Get into such kind of communities and make use of current online comparison.
Why people should take the help of various brokers, when there are many trading communities to help them out. These brokers only charge heavy fees. Why you should pay money to these guys, instead of it store these money for investing it in the future investment platforms. But there is something which you need to know. Never be in touch with an incompetent trading community. This will only waste your money and finally, you will be in a dire situation.
Let your money grow the way you want. Just do not hope to have a hefty amount of money. You need to put your efforts into these online trading communities, so that you can make best make use of online trading comparison. There is no other short cut to earn more money. Your dreams can come true only with online communities and comparison of issues.
The concept of online trading comparison has been very successful in the current world. Such kind of comparison is helping people to used their money for investing it in the global economy. The surveys on the global economy show that people these days do not like to keep their hard earned money in the banks. They are just moving towards the investment banks. How these people have come to know about these investment banks. This is only done by various online trading communities. Get into such kind of communities and make use of current online comparison.
Why people should take the help of various brokers, when there are many trading communities to help them out. These brokers only charge heavy fees. Why you should pay money to these guys, instead of it store these money for investing it in the future investment platforms. But there is something which you need to know. Never be in touch with an incompetent trading community. This will only waste your money and finally, you will be in a dire situation.
Let your money grow the way you want. Just do not hope to have a hefty amount of money. You need to put your efforts into these online trading communities, so that you can make best make use of online trading comparison. There is no other short cut to earn more money. Your dreams can come true only with online communities and comparison of issues.
Why the Fourth Quarter Won't Be Any Better For Stocks
In yesterday's essay I explained why I think the Fourth Quarter will offer plenty of more surprises-to the downside-for unsuspecting investors. My reasoning for this is simple: analyst estimates for the 4Q08 are still far too positive (the fact that they're positive at all says a lot about the quality of analysis).
However, there's another component to the ugliness that will be 4Q08: performance gaming.
If you're unfamiliar with the term, it describes a process in which fund managers and other institutional investors close out losing positions to mask their performance for the Quarter. By doing this, the manager avoids reporting his losing positions thereby "gaming" his performance.
I'll explain.
The SEC requires fund managers to publish their existing positions at the end of each quarter. According to SEC regulation, they have to publish the names of the companies they own, as well as the number of shares they own and the value (in dollars) of their position.
STIMULUS DIVIDENDS
An Obscure Tax Loophole That Pays 10, 20, even 50 times Bush's Stimulus Checks.
WELCOME to your FREE trial.
Because of this, it's fairly easy to gauge the profit or loss they've posted on any position that's been in the portfolio for more than a quarter. However, it's important to note that managers only have to post the positions they own at the end of the quarter... not the day before that... or any other day during the quarter for that matter.
So, if a given position is deep underwater, a fund manager can liquidate it and simply report a larger cash balance at the end of the quarter, thereby temporarily covering up the loss. Of course, this technique doesn't work in the long-term-all of the fund's moves can be pieced together via other SEC filings-but at that point bonuses have usually already been handed out, so who cares?
Now, on to 4Q08.
By any measure, October has been one of the worst months in financial history. Stocks posted their worst single day drop since the Crash of 1987. They also posted their worst week EVER. And if the year had ended on October 10, it would have been one of the worst years for US stocks in history. Despite a few up days, the S&P 500 is still down 38% as of yesterday's close.
Now, it's widely documented that most funds trail the stock market in terms of returns. So what are the odds that most, if not all, institutional investors are currently underwater on a sizable portion of their portfolios? And which is going to look better at the end of the fourth quarter: a portfolio full of losses or fewer losses and more cash?
The liquidations we've seen thus far from institutions have largely stemmed from redemptions-clients pulling their money from the fund, forcing the fund to liquidate its holdings to return the money. Between this-it's not like fund clients are suddenly going to become confident about the market again-and the wave of liquidations from performance gaming, the market is going to experience plenty of downward pressure come the end of 4Q08.
The only thing that could amend this would be a substantial rally. So if stocks don't break out of their trading range during the next six weeks, I'd be very wary about mid- to late-December.
However, there's another component to the ugliness that will be 4Q08: performance gaming.
If you're unfamiliar with the term, it describes a process in which fund managers and other institutional investors close out losing positions to mask their performance for the Quarter. By doing this, the manager avoids reporting his losing positions thereby "gaming" his performance.
I'll explain.
The SEC requires fund managers to publish their existing positions at the end of each quarter. According to SEC regulation, they have to publish the names of the companies they own, as well as the number of shares they own and the value (in dollars) of their position.
STIMULUS DIVIDENDS
An Obscure Tax Loophole That Pays 10, 20, even 50 times Bush's Stimulus Checks.
WELCOME to your FREE trial.
Because of this, it's fairly easy to gauge the profit or loss they've posted on any position that's been in the portfolio for more than a quarter. However, it's important to note that managers only have to post the positions they own at the end of the quarter... not the day before that... or any other day during the quarter for that matter.
So, if a given position is deep underwater, a fund manager can liquidate it and simply report a larger cash balance at the end of the quarter, thereby temporarily covering up the loss. Of course, this technique doesn't work in the long-term-all of the fund's moves can be pieced together via other SEC filings-but at that point bonuses have usually already been handed out, so who cares?
Now, on to 4Q08.
By any measure, October has been one of the worst months in financial history. Stocks posted their worst single day drop since the Crash of 1987. They also posted their worst week EVER. And if the year had ended on October 10, it would have been one of the worst years for US stocks in history. Despite a few up days, the S&P 500 is still down 38% as of yesterday's close.
Now, it's widely documented that most funds trail the stock market in terms of returns. So what are the odds that most, if not all, institutional investors are currently underwater on a sizable portion of their portfolios? And which is going to look better at the end of the fourth quarter: a portfolio full of losses or fewer losses and more cash?
The liquidations we've seen thus far from institutions have largely stemmed from redemptions-clients pulling their money from the fund, forcing the fund to liquidate its holdings to return the money. Between this-it's not like fund clients are suddenly going to become confident about the market again-and the wave of liquidations from performance gaming, the market is going to experience plenty of downward pressure come the end of 4Q08.
The only thing that could amend this would be a substantial rally. So if stocks don't break out of their trading range during the next six weeks, I'd be very wary about mid- to late-December.
Where is Your Company Hoarding Its Cash?
In today's market, a transparent balance sheet is perhaps the most coveted asset a company can have. With everyone from mortgage lenders to commercial banks, investment funds, and even food processors losing money due to derivatives, mortgage backed-securities, currency hedges, and other items, a clean balance sheet that is flush with cash and no hidden issues is a rare and wonderful thing.
Indeed, this is precisely what made Wrigley's and Budweiser so attractive from a buy-out perspective. It's certainly what convinced the banks/ investors backing the deals to lend the necessary funds for the deals to go through-compare this to the Bank or America/ Countrywide deal in which it's still not clear precisely what Bank of America is buying and what it's not.
However, in today's financial crisis, it's not merely enough for a company to be sitting on mounds of cash. You need to know WHERE exactly that cash is sitting.
After all, it's not like Microsoft just goes and buries $20 billion in its backyard. Budweiser doesn't have a warehouse filled with mattresses stuffed with money. And Coke doesn't have a giant piggy bank the size of a football field just sitting somewhere-though personally I think this might be a good idea since they could turn it into a theme park (desperate financial conditions call for desperate measures to make a buck).
No, corporations with huge cash hoards have to put that money to work somewhere until they use it in a deal or stock buyback or what have you. And therein lies the problem. If you've got $20 or $30 billion, where can you store it safely?
Banks are going under, and the FDIC only insures deposits of up to $250K-they raised limits as part of the mega-bailout. Treasuries are looking less and less attractive with every intervention/ liability the Feds add to the US balance sheet. Agency securities are questionable at best-Taiwan began openly questioning the quality of Fannie and Freddie securities last week.
Again, where do you put all that money?
Honestly, I don't have an answer for this question. But I do know that in today's financial crisis, I'd much rather invest in a cash rich company that details where it's putting its cash, rather than a company that simply states its cash amount on the balance sheet without any specifics.
I'll give you an example.
On a superficial level, Apple (AAPL) and Microsoft's (MSFT) basic business are the same: selling software and hardware related to computers and personal electronics devices. And today, both companies are sitting on similar cash hoards: $20 billion in cash and short-term investments. However, that's where the similarities in balance sheets end.
AAPL provides a line-by-line breakdown of its short-term investments (taken from latest 10-Q):
Cash $294 million Treasury and Agency Securities $6.9 billion US Corporate Securities $9.5 billion Foreign Securities $3.8 billion
Microsoft, on the other hand, provides no specifics, but simply writes the following (taken from latest 10-Q):
Our investments consist primarily of fixed-income securities, diversified among industries and individual issuers. Our investments are generally liquid and investment grade. The portfolio is invested predominantly in U.S. dollar-denominated securities, but also includes foreign-denominated securities in order to diversify financial risk. We invest primarily in short-term securities to facilitate rapid deployment for immediate cash needs...
While we own certain mortgage- and asset-backed fixed-income securities, our portfolio as of September 30, 2008 does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral. The majority of the mortgage-backed securities are collateralized by prime residential mortgages and carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. (emphasis added)
Now, I'm not saying one company's cash is necessarily safer than the other's. I'm also not trying to indicate anything about the quality of Microsoft's accounting or balance sheet.
All I'm saying is that of the two, AAPL provides individual shareholders with a much better understanding of where its cash is. Because of this, gauging the safety of that cash-as well as the potential for that cash to be eaten up by a bad bet-is much easier.
With the financial crisis running full force, and losses and write-downs showing up even in the oddest of places-Sadia, a Brazilian meat processor lost a bundle on currency speculation-the transparency of a business's balance sheet is paramount in gauging its market risk.
If you're looking to put your money to work in this environment, you're going to be stomaching a lot of volatility in the process. Knowing the details of the company's balance sheet and cash hoard provides you with just that much more conviction about the quality of its business and financial standing.
You'll need this conviction when the company's share price takes you for a roller coaster ride.
Indeed, this is precisely what made Wrigley's and Budweiser so attractive from a buy-out perspective. It's certainly what convinced the banks/ investors backing the deals to lend the necessary funds for the deals to go through-compare this to the Bank or America/ Countrywide deal in which it's still not clear precisely what Bank of America is buying and what it's not.
However, in today's financial crisis, it's not merely enough for a company to be sitting on mounds of cash. You need to know WHERE exactly that cash is sitting.
After all, it's not like Microsoft just goes and buries $20 billion in its backyard. Budweiser doesn't have a warehouse filled with mattresses stuffed with money. And Coke doesn't have a giant piggy bank the size of a football field just sitting somewhere-though personally I think this might be a good idea since they could turn it into a theme park (desperate financial conditions call for desperate measures to make a buck).
No, corporations with huge cash hoards have to put that money to work somewhere until they use it in a deal or stock buyback or what have you. And therein lies the problem. If you've got $20 or $30 billion, where can you store it safely?
Banks are going under, and the FDIC only insures deposits of up to $250K-they raised limits as part of the mega-bailout. Treasuries are looking less and less attractive with every intervention/ liability the Feds add to the US balance sheet. Agency securities are questionable at best-Taiwan began openly questioning the quality of Fannie and Freddie securities last week.
Again, where do you put all that money?
Honestly, I don't have an answer for this question. But I do know that in today's financial crisis, I'd much rather invest in a cash rich company that details where it's putting its cash, rather than a company that simply states its cash amount on the balance sheet without any specifics.
I'll give you an example.
On a superficial level, Apple (AAPL) and Microsoft's (MSFT) basic business are the same: selling software and hardware related to computers and personal electronics devices. And today, both companies are sitting on similar cash hoards: $20 billion in cash and short-term investments. However, that's where the similarities in balance sheets end.
AAPL provides a line-by-line breakdown of its short-term investments (taken from latest 10-Q):
Cash $294 million Treasury and Agency Securities $6.9 billion US Corporate Securities $9.5 billion Foreign Securities $3.8 billion
Microsoft, on the other hand, provides no specifics, but simply writes the following (taken from latest 10-Q):
Our investments consist primarily of fixed-income securities, diversified among industries and individual issuers. Our investments are generally liquid and investment grade. The portfolio is invested predominantly in U.S. dollar-denominated securities, but also includes foreign-denominated securities in order to diversify financial risk. We invest primarily in short-term securities to facilitate rapid deployment for immediate cash needs...
While we own certain mortgage- and asset-backed fixed-income securities, our portfolio as of September 30, 2008 does not contain direct exposure to subprime mortgages or structured vehicles that derive their value from subprime collateral. The majority of the mortgage-backed securities are collateralized by prime residential mortgages and carry a 100% principal and interest guarantee, primarily from Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. (emphasis added)
Now, I'm not saying one company's cash is necessarily safer than the other's. I'm also not trying to indicate anything about the quality of Microsoft's accounting or balance sheet.
All I'm saying is that of the two, AAPL provides individual shareholders with a much better understanding of where its cash is. Because of this, gauging the safety of that cash-as well as the potential for that cash to be eaten up by a bad bet-is much easier.
With the financial crisis running full force, and losses and write-downs showing up even in the oddest of places-Sadia, a Brazilian meat processor lost a bundle on currency speculation-the transparency of a business's balance sheet is paramount in gauging its market risk.
If you're looking to put your money to work in this environment, you're going to be stomaching a lot of volatility in the process. Knowing the details of the company's balance sheet and cash hoard provides you with just that much more conviction about the quality of its business and financial standing.
You'll need this conviction when the company's share price takes you for a roller coaster ride.
Tired of Stock Market Losses? 3 Tips to Know When to Get Out of the Market
Tired of seeing losses in your investments? Ever sell at the bottom? Do you wish you could've gotten out sooner? Let's face it. Most of us are terrible at timing the market. But that shouldn't be an excuse to head for the hills. Wouldn't it make more sense to know when not to be involved in the market, and more importantly, when you should get back in? Picking when to enter into the market can be just as important as what you pick.
Of course, it may seem easier to avoid the market altogether by just investing in bonds or real estate. But getting out of the market forever is not necessarily the best thing to do. After all, the stock market has outperformed the bond market and real estate over the long term. And the most likely way for us to fulfill our investment plans is by getting the highest possible returns necessary without too much risk.
Besides, unless another investment vehicle becomes a better reflection of economic growth like the stock market, I am afraid we are stuck in investing in the market in order to get better returns in good times and bad. Or are we?
Knowing when to get in
While I have earlier suggested what investments we should focus on, we didn't discuss when it's a good time to buy. And that's very important to know. Think about it. Do you just go out and buy a car any day? No, you wait for a sale or go at the end of the month when the dealers need to make their sales quota. How about clothes? Again, most wait for a sale. This is the same concept you should have with investing in mutual funds, ETFs or stocks. You wait for a sale. Here are 3 indicators I use that can help me determine when the market on "sale."
Indicator #1: The economy
Unfortunately, "red hot sales" in the market are more or less dependent on economic growth. For example if we expect an economic slowdown over the next 6 months or longer, the stock market will most likely sell off. Why? An economic slowdown means most companies will grow less. Would you pay more for a stock in a company that will grow less? Not me!
So, one indicator to let us know whether we may want stay in the market is to ask ourselves if the economy is going to grow, to slow or to maintain its current course. To figure this answer out, you could talk with your broker or read some monthly finance magazines. Magazines like Money, Forbes or Klinger's will have columnists dedicated to writing a one pager discussing the economic outlook. Remember, don't make this complicated. You are just looking for a couple of professional opinions, so you can make your informed decision.
Unfortunately, looking at the economy is not good enough, since this is a very slow and vague indicator of how to handle our money. I think we can do better...
Indicator #2: Market Volatility
There is an old Wall Street adage: Stocks tend to sell off 3 to 4 times faster than they climb. Why? There are many people who already own stocks who need to get out, and are looking for buyers. No one wants to be the first one to buy when a stock or the market seems to be in trouble. Would you? So stocks fall faster than they rise.
When stocks sell off faster, volatility (which is a fancy word for measuring how much a stock's price moves) increases. When the entire stock market sells off, the volatility across many stocks start to rise. To help see this increase in volatility across the board more clearly, volatility indicators, like the put/call ratio and the VIX, were created and can be tracked much like an index.
Here's how it works. If the market has sold off recently, I would see a rise in the VIX index. The more the market goes down, the higher the VIX indicator climbs, just like playing on a seesaw when you were a kid. When the VIX rises to a certain point, I exit the market. I make it that simple! In my guide, I go through an example using the VIX and show specific points and strategy I use to get in and get of the market. Obviously, my timing is not perfect, but I also miss long term corrections too!
While this is a good and clear indicator, it only works when the markets get more volatile. What if you want to get in the market when it is calm or starting to rise? There are shorter term indicators that can be used.
Indicator #3: Technical Analysis
Technical Analysis is just looking at your stock's price and volume movements on a graph, and then drawing a conclusion. It basically tries to predict future price movements from previous price movements. For example, let's say if the stock market had a big run up or just has experienced a big sell off, you can use a technical indicator to help you determine if or when the stock market may turn around.
Unfortunately, there are literally dozens of indicators to learn, none of them work perfectly and it takes time and commitment for you to master. But for me, I do my best to focus just on combining just a few long term indicators discussed in my guide. While there is no panacea to which technical indicators work best, I found that using a combination of few indicators proves to be better than the alternative of just simply guessing when to get in or out of my positions. Many discount brokers will also offer their clients free education to help them out.
Putting it altogether
By taking a look at the overall health of the economy, a few volatility indicators and some technical analysis, I am able to better determine when to get out of my positions. In fact, I use the combination of all three. It may not be perfect, but following each approach has really helped me determine when the market goes on sale or when it's time to get back in.
The next time you decide to get into an ETF or a stock, first ask yourself at what point should get in. If the answer is "because it feels right," think about better ways to make that decision. And as always, have a stop program to make sure small losses don't become catastrophes. The best investors in the world tend to be better because they not only know what to get into, but often when. Become a better investor!
Of course, it may seem easier to avoid the market altogether by just investing in bonds or real estate. But getting out of the market forever is not necessarily the best thing to do. After all, the stock market has outperformed the bond market and real estate over the long term. And the most likely way for us to fulfill our investment plans is by getting the highest possible returns necessary without too much risk.
Besides, unless another investment vehicle becomes a better reflection of economic growth like the stock market, I am afraid we are stuck in investing in the market in order to get better returns in good times and bad. Or are we?
Knowing when to get in
While I have earlier suggested what investments we should focus on, we didn't discuss when it's a good time to buy. And that's very important to know. Think about it. Do you just go out and buy a car any day? No, you wait for a sale or go at the end of the month when the dealers need to make their sales quota. How about clothes? Again, most wait for a sale. This is the same concept you should have with investing in mutual funds, ETFs or stocks. You wait for a sale. Here are 3 indicators I use that can help me determine when the market on "sale."
Indicator #1: The economy
Unfortunately, "red hot sales" in the market are more or less dependent on economic growth. For example if we expect an economic slowdown over the next 6 months or longer, the stock market will most likely sell off. Why? An economic slowdown means most companies will grow less. Would you pay more for a stock in a company that will grow less? Not me!
So, one indicator to let us know whether we may want stay in the market is to ask ourselves if the economy is going to grow, to slow or to maintain its current course. To figure this answer out, you could talk with your broker or read some monthly finance magazines. Magazines like Money, Forbes or Klinger's will have columnists dedicated to writing a one pager discussing the economic outlook. Remember, don't make this complicated. You are just looking for a couple of professional opinions, so you can make your informed decision.
Unfortunately, looking at the economy is not good enough, since this is a very slow and vague indicator of how to handle our money. I think we can do better...
Indicator #2: Market Volatility
There is an old Wall Street adage: Stocks tend to sell off 3 to 4 times faster than they climb. Why? There are many people who already own stocks who need to get out, and are looking for buyers. No one wants to be the first one to buy when a stock or the market seems to be in trouble. Would you? So stocks fall faster than they rise.
When stocks sell off faster, volatility (which is a fancy word for measuring how much a stock's price moves) increases. When the entire stock market sells off, the volatility across many stocks start to rise. To help see this increase in volatility across the board more clearly, volatility indicators, like the put/call ratio and the VIX, were created and can be tracked much like an index.
Here's how it works. If the market has sold off recently, I would see a rise in the VIX index. The more the market goes down, the higher the VIX indicator climbs, just like playing on a seesaw when you were a kid. When the VIX rises to a certain point, I exit the market. I make it that simple! In my guide, I go through an example using the VIX and show specific points and strategy I use to get in and get of the market. Obviously, my timing is not perfect, but I also miss long term corrections too!
While this is a good and clear indicator, it only works when the markets get more volatile. What if you want to get in the market when it is calm or starting to rise? There are shorter term indicators that can be used.
Indicator #3: Technical Analysis
Technical Analysis is just looking at your stock's price and volume movements on a graph, and then drawing a conclusion. It basically tries to predict future price movements from previous price movements. For example, let's say if the stock market had a big run up or just has experienced a big sell off, you can use a technical indicator to help you determine if or when the stock market may turn around.
Unfortunately, there are literally dozens of indicators to learn, none of them work perfectly and it takes time and commitment for you to master. But for me, I do my best to focus just on combining just a few long term indicators discussed in my guide. While there is no panacea to which technical indicators work best, I found that using a combination of few indicators proves to be better than the alternative of just simply guessing when to get in or out of my positions. Many discount brokers will also offer their clients free education to help them out.
Putting it altogether
By taking a look at the overall health of the economy, a few volatility indicators and some technical analysis, I am able to better determine when to get out of my positions. In fact, I use the combination of all three. It may not be perfect, but following each approach has really helped me determine when the market goes on sale or when it's time to get back in.
The next time you decide to get into an ETF or a stock, first ask yourself at what point should get in. If the answer is "because it feels right," think about better ways to make that decision. And as always, have a stop program to make sure small losses don't become catastrophes. The best investors in the world tend to be better because they not only know what to get into, but often when. Become a better investor!
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