Timing Stock Market
Timing of the stock market is a complex concept because the forces
of risk and reward are in constant motion. Risk is defined as the ups
and downs of returns. Risk is that chance that you will receive a
return less than you expected. Although risk and long term reward is
generally related, many people make the mistake of thinking that risk
will go to zero if they wait long enough. That notion is simply not
true. Risk does go down the longer the time period. But simply holding
a stock long enough won't guarantee that it will produce returns
higher than other assets.
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In considering timing of the stock market, it doesn't matter what kind
of investment it is, all investments are subject to risk. Generally
speaking, the greater the risk, the greater the return. For example:
investments in the stock market hold greater risk than simply putting
your money in a savings account. That is because the stock market's
return is typically greater.
To achieve your financial goals, you must develop the ability to
handle risk. Your ability to handle risk depends upon a number of
factors such as age, portfolio size, income, timing, liquidity needs,
investment knowledge, and attitude toward price fluctuations. What is
considered very risky to one individual may not be a problem at all to
another.
Timing the stock market also is a risk consideration when buying
during an upswing in price. Upswings can induce investor fear that
they are buying high, only to end up selling low later on.
Understanding that even though a stock may be at an all time high
doesn't mean that it will not go any higher.
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To reduce the impact of risk, it is important to invest regularly.
This practice allows you to average out the impact of risk.
While timing the stock market, the last thing anyone wants to do is
buy high only to be forced to sell low. Understanding that
traditionally the stock market performs well over long terms of
investment helps investors to minimize risks over short term market
downturns.
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