Have you ever been a victim to marketing timing and inevitably losing a lot of your money?  Market timing is something that so many new investors fall victim too over and over again, so the real question is – how can I avoid the trap of market timing?  Let me help out with some concrete tips!

When I first started investing, I thought that I was going to be the best investor alive and that I was smarter than everyone else – turns out that was not the case! 

My process was this – I bought shares of three different companies.  One was from the company I work for; one was from a Master Limited Partnership of the company I work for, and then the last was from a stock that I googled “best stocks to buy under $10.”

Seems like a great process, right?

Wrong!

Buying stock in my own company was a great idea because I was familiar with the company and the industry but buying stock from this random company was not a great idea.

Honestly, it’s not even the fact that I bought a random company because I feel like it’s important to get your feet wet in the market because that’s when terms and other pieces of information will really start to click, but it was the fact that I bought it wit the intention to day trade it.

I knew next to nothing about the company – how was I going to day trade it?

Well, the company that I bought was Sunrun (RUN) at a price of $7.93/share.  I ended up trading it around a bit, lost a decent amount of money, and then eventually decided just to hold my shares.  At the end of the day, I sold it around $14, so a pretty nice return of about $6/share!  Well, unfortunately I only made about $3/share because I kept trying to trade it.

Still a great return, but way worse than if I had simply held the stock.

And if you’re curious about how RUN is doing right now, let’s just say it pains me:

Market timing is essentially just what it sounds like – you’re trying to time the market and then buy in and out of stocks to max your gains. 

Basically, you want to buy on the dips and sell on the peaks, so even if a stock only goes up 10%, you’re trying to make more by buying and selling multiple times to get an even larger return.

This is typically more common in volatile stocks that have major swings up and down as that creates more opportunities to make money…but also more opportunities to lose money!

Why Market Timing Doesn’t Work

Personally, I am really against market timing in this sense because it’s a surefire way to lose money for the average investor.  If you’re like I am, then you’re not special.  Any information that you get about a specific stock is all common knowledge by the time you read it, so trying to buy and sell off of common knowledge is really a dangerous game because you’re the last person to know that info.

I think all first-time investors think that they can time the market because it really doesn’t seem that hard, but it is.  Every day on CNBC I hear about the “Robinhood Traders” that are all trying the time the market during COVID-19 right now and it cracks me up. 

I literally heard one analyst say that she’s shorting Kodak because the stock has been fairly steady lately and she thinks that the Robinhood Traders will get bored and sell their stock to invest in the next shiny thing.

It sounds insane but also not an awful idea, and with Robinhood being an app that attracts these first-time investors, I think it also brings out the day trader in those investors, not to mention the app is really setup to make people want to day trade.

I used to use Robinhood and I switched to Fidelity after Robinhood crashed and I will never, ever go back.  There are so many different options to Robinhood so I urge you to really consider all options before making a final decision.

The good news is that no matter where you’re investing or how long you’ve been investing, there are concrete steps that you can take to make sure that you stay a rational investor!

Ways to Avoid Market Timing

Trust the history of the stock market

I think that this is a big one for me to stay rational.  The stock market has a 100% success rate of going up over time, so as long as you can trust that the market is going to continue to do that, it should help you avoid partaking in any sort of marketing timing:

I mean, look at all of those good buying points as long as you are investing for the long-term.  Even if you buy at a point that then immediately dips, you can see that the market fully rebounds within a few years.

Create speedbumps when you’re investing

The biggest speedbump that I have is that I do not actually have my Fidelity app on my phone so it keeps me from making an irrational decision and selling or buying stocks.  I only make transactions on my computer and while logging onto a computer isn’t some major hassle, it takes a little more time than simply logging onto an app and hitting that buy or sell button.

I’ve talked about this before on the podcast and honestly it has been a big help in my investing returns.

Another one that I do is that I will not watch CNBC with my phone.  It sounds insane but when I hear people talking about stocks, I will pull them up on my phone and in the past, I’ve made an irrational decision and bought or sold stocks literally in that moment.

Some of the analysts will say things like “buy this stock at $42 and then sell at $45”.  That is timing the market!  This is exactly what I am trying to avoid but exactly what my brain wants to do because it seems like a locked-in $3 gain, right?

Until it doesn’t happen…

I love watching CNBC and I find that when I just don’t have my phone, I can’t make these bad choices, so I will watch it but leave my phone in a different room. 

Honestly, these speedbumps can sound as ridiculous as they need, but as long as they keep you from timing the market, then you’re going to be a better investor!

Only look at your portfolio periodically

This tip is something that I think is imperative to try to help you stay away from frequently trading.  The more that you look, the more likely you’re going to be to make an impulse decision.  It’s human nature!

I think that one thing that you can do is try to only look when the market is closed.  Maybe that means in the AM and PM before/after trading hours; maybe it means only on the weekends; maybe it means only once/quarter! 

If you look only when the market is closed then even if you want to make a buy/sell, you can, but it won’t actually place until the market opens, therefore taking away some of the gratification of making that trade. 

Do your own analysis

This one seems obvious but when I bought my first stock, and even many others after that, I wasn’t ever doing my own analysis.  Refusing to buy a stock until you do your own analysis will benefit you in two ways:

1 – you have an immediate “speedbump” built in because you can’t do anything until you take the time needed to actually go through and review that stock.  Personally, I like to analyze a stock over a few days or even a week, so this is an immediate speed bump to slow things down for me from trying to trade or make an impulse decision.

2 – when you do your own analysis then you understand the company very well and trust what they do.  A lot of times, day traders will sell off very small gains and then buy back at lower points, but if you trust the company and think it’s undervalued, are you going to sell after a 1% gain?  Doubtful.

You will likely want to hold onto that company unless something materially changes, right?

So, if you do your own analysis, you’re much more likely to actually be able to calm any sort of desire to day trade, therefore making you much more content with simply buying and holding, a strategy that most of us should only be partaking in.

Set it and forget it

Whether you’re someone that dollar cost averages or someone that’s a lump sum investor, if you’re investing on a schedule and then you forget about it until the next time you put money in, maybe that’s every paycheck or at the end of the month when you have leftover money in your budget, then you’re going to be less likely to make impulsive decisions.

Personally, I have a Dividend Aristocrats of the Future portfolio, and I love every two weeks when I get paid just putting money into whatever company is at the lowest current portfolio value.  I try to keep them all balanced and this is in a way allowing me to keep my focus on whichever company is undervalued.

By only putting more money in every two weeks, I completely avoid any thoughts at all about selling those stocks and only think about getting paid and adding more to my portfolio.

Create rules

Create rules to try to avoid buying and selling frequently.  Maybe this means you can only look at your portfolio once/day, or like my rule about not having my brokerage app on my phone, or maybe you can only buy and sell a stock in the same quarter 1 time. 

Simples rules like this will help train yourself to flourish with a buy and hold strategy.  Obviously, you have to stick to those rules, so they can become even more extreme if necessary, such as hiring a financial advisor and only letting them be the ones that actually touch your investments.

If you find yourself not being able to completely avoid trying to time the market, there are a few tings that you can do to ‘scratch that itch’ in a manner that doesn’t jeopardize your wealth.

Ways to Safely Try to Time the Market

Post-Audit yourself

I think this is by far the most important one.  Make sure to keep a very thorough tracking system of your buys and sells and track to see how you actually did.  If you don’t do this, you’re never going to know if you actually made money.

I am a huge fan of benchmarking yourself to the S&P 500 but in this case you should benchmark yourself to the actual performance of the stock.  If you buy and sell 3 times during which a stock goes from $50 to $60, did you make more or less than $10/share?

Truthfully, I bet you made less, so tracking this can help give you exposure to that and potentially give you some quantitative reasons to avoid market timing.

Learn early & cheap!

If you are going to engage in market timing, do so right away, and for a few reasons:

1 – you likely will have the least amount of money in the market so trying to time it and failing won’t be as big of a mistake

2 – you’re likely going to have this itch at some point in your investing journey, so if you can learn early on that it doesn’t work well for you, then you’re likely not going to have that itch later in life when you have more money at risk.

Set aside a certain amount to be speculative

If you find that you just can’t avoid it, then limit a certain allocation of your portfolio to it.  Personally, I love to engage in speculative investing but I know that it is much risker, so I will limit the amount that I can be speculative with.

Even when I am being speculative, I’m still not timing the market but rather just picking more speculative stocks.  If you find that you have to keep timing the market, or maybe you have found that you have a track record of success doing it, limit your portfolio to only 10% being in this market timing aspect.

If need be, just open a separate account entirely so that the money is completely separate from the rest of your portfolio and the lines never get blurred.

Look at your portfolio daily

I look at my portfolio daily because I think it has eventually made me numb to major swings in the market.  During the early stages of COVID-19 when the market was dropping 10% in a day, I wasn’t selling at all.  I was buying.

By learning from my lessons earlier in my investing journey, I learned that if the market was going to crash then it would create buying opportunities.  By looking at my portfolio early in my career, it numbed me to this major changes so instead of panicking, I was calm and new exactly what to do.

Strengthen your risk appetite

When you’re market timing your risk appetite is likely going to become stronger.  Overall, this is a very good thing, as long as you put it to a good use.  By strengthening your risk appetite you’re going to be much more likely to avoid buying high and selling low, likely because you’ve made those mistakes before.

Everyday I try to become more welcoming to risk, so by focusing on trying to strengthen my risk tolerance, it has helped me a out a ton in my investing journey. 

It has kept me from trying to time the market because I know that things will eventually rebound, even if I buy in at a point where things still continue to get worse.

Don’t repeat mistakes

This is an easy one to say but hard to implement – when you make mistakes, simply just write them down with details and make sure they’re never repeated.  The best way to not make mistakes is to learn from the ones you’ve already made.

Summary

Do I Time the Market?

Short answer – no.

Long answer, it highly, highly depends.  Basically, in one situation I will.  Let me explain:

Earlier this year in 2020 when COVID-19 was just getting going, the stock market crashed by 30%.  Personally, I didn’t think that this was going to be a super long-term thing and I didn’t think that COVID-19 was permanently changing every single business, so I invested in some companies that were getting hammered.

A couple of those were ROKU and PFGC, both companies that I thought were being unfairly punished, and have rebounded quite nicely in the few months past COVID-19.

If you want to pull forward some money to max out an IRA earlier than originally planned like I did, I have no issue with that at all.  But if you’re going to sit there and trade in and out of stocks for market timing, prepare for some turbulence ahead!