To Time or Not to Time?

By Chris Johnson

Dear Reader,

Mark Twain once said the return of his money is more important than the return on his money. Many investors get into this same mindset when they look at the market during volatile times like the current environment.

So why would I even begin to suggest that you try to time the market? It’s simple. That’s how you make money over time.

That indeed has been the question since the dawning ages of the market. Listen to the average financial advisor and they’ll tell you to put your money in the market and forget it. I was brought up in the industry with this exact viewpoint. But it’s one that I no longer subscribe to, obviously. The idea that the market gyrates up and down scares the heck out of many investors, so why do so many time the market? One word - opportunity.

Twenty years ago, the “average” investor didn’t know what the market did on a weekly, or even monthly, basis. This was the business of their broker. Now, due to an incredible combination of information, distrust, and a hands-on attitude, the “average” investor has been thrust into the market’s daily trading activity.

But is this for better or for worse?

Through my 20-plus years of experience in the field, I can say with certainty that the average investor is much better off, as long as they have the right tools in their toolbox.

Think about it, during the recent market decline, if you had dodged just three percent of the decline and then put your money back to work, you’d have increased your net return by that three percent. You’re now ahead of the “average” investor when the market finally comes around.

Now, stocks typically endure at least two to three pullbacks a year, even in a roaring bull market. Catch just two of these and you’re well ahead of the typical Wall Street portfolio manager who struggles to simply keep up with the S&P 500. Congratulations!

Go one step further and compound this return over a 20-year period and you’ll get the idea of how profitable a little work can be. Remember, I’m just talking about catching a small amount of a pullback here, not timing the exact top and bottom. Now we’re talking about a vacation home at retirement instead of a rental pop-up camper.

So how do you do this? By simply maintaining an awareness of your surroundings. The combination of watching the daily market activity and a few simple indicators will empower you to add these returns to your portfolio.

Why should you care what the market does on a daily basis? Movement equals opportunity. Those investors who choose to not actively manage their investments are doomed to ride what can be a jolting roller coaster ride without netting a single dollar’s return.

Maintaining an awareness of where a few of the market’s key technical levels are is almost all that you need to do to find these huge opportunities. A couple of these indicators are the S&P 500’s 50-day, 10-month, and 20-month moving averages. The market’s moves are typically exaggerated when it approaches and crosses these “lines.”

As for the simple indicators, the two most effective are the CBOE Volatility Index (VIX) and the CBOE equity put/call ratio. Monitoring these two indicators will always cue you in on whether money is flowing into or out of the market. Believe me, this is the highest impact influence on market direction.

Monitoring these indicators and trendlines is as easy as logging on to the Internet (thank you, Al Gore!). There are more than a few sites and commentators who will keep you apprised of the activity in these key market indicators.

So how about the concept of finding “value” stocks that are a good buy regardless of what the market is doing? Balderdash! Remember that 80-85 percent of all stocks follow what the market does. That means most stocks out there are going to go down when the market goes down. Investing in those “value” stocks is more difficult than figuring out when the market is going to put in a top. I’ll guarantee you that you’ll make more money over time swimming with the market’s tides versus trying to find the few opportunities that exist counter to that trend.

I hope that I’ve taken a little of the anxiety surrounding market “timing” out of the equation by pointing out that it’s not necessary to get out of the market at an exact top and back in at the exact bottom. By simply grabbing a few percentage points in either direction, your overall returns will grow exponentially over time. And it’s something that can be done easily with a little work and attention to the market’s ever-changing environment.

Have a great trading week.