Research indicates that that markets and individual share prices tend to follow trends.
This ‘price momentum’ is attributed to long-standing behavioral biases and/or the activities of central banks and corporate hedging programs.
In Thinking of buying shares? – here’s a starting point, we discussed the value of time (both investment time horizon, and the timing of market purchases) as a means of reducing risk. Inevitably though, share investing involves accepting risk in order to make returns.
Some investors seek to increase returns by ‘timing the market’ in one of three ways.
1. Having decided to buy or sell a particular share, some investors will seek to add value by ‘trading in’ or ‘trading out’, that is, by trying to pick the trend to determine the best time to buy or sell.
2. Short term investors – traders – take this timing approach to the extreme: only ever planning to hold stocks for months, weeks (or even days or hours) before selling them again.
3. A blended approach called ‘core and satellite’ entails a ‘core’ long-term ‘buy and hold’ portfolio and a ‘satellite’ portfolio of traded shares.
Some investors with established portfolios seek to enhance returns in this way. If this is you, you could consider a disciplined approach to manage your risk: allocate, say 10% or 20% of your portfolio to trading. As years go by, you may consider your expertise to have increased sufficiently to increase this proportion.
Some start from the other direction. Only having a small initial stake to invest (but one they can afford to loose), they trade the market to build an investment pool, later allocating some of this money to long term investments.
Whichever way you choose you go about it, remember the old traders saying: the trend is your friend.
A simple chart will sometimes offer a quick feel for whether a trend in place. It’s not always simple though and traders use a range of technical indicators to help them decide if a trend is forming or being broken.
Trading shares of course involves significant risk as well as tax implications. If you are new to trading, we suggest you seek professional advice before proceeding.
What are your thoughts?
Do you own shares directly? Have you had positive or negative experiences trying to time the market?
Join the conversation — leave a comment below and let us know what you’re thoughts are.
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