How to Ride the Stock Market Without Wiping Out
You’ve probably heard the age-old stock market advice before: ?buy when everyone else is selling and sell when everyone else is buying.?? You might have missed the last opportunity to get into the stock market when it came crashing down in 2008 and then rebounded somewhat over the next couple of years.?If you had the insight and money (and the balls) to buy a stock or a fund when it was hitting rock bottom, you might not have gotten rich, but? you’d have earned a nice amount as you rode the market back up from the abyss.
As stocks continue to waiver today, people who missed out on past trends might be thinking that now is a good time to enter the market and reap similar rewards.
At least this seems like a good idea in theory. But how can a novice or a casual investor call the bottom of a downtrend when experienced Wall Streeters and soothsayers alike have a difficult time doing so??You’d probably find better odds in Las Vegas trying to hit 21 before the dealer.
But even so, the chances of missing the easy profits that seem bound to come eventually is almost as scary as putting your money into the market in the first place.
You could go the index fund route, buying a mutual fund or exchange traded fund that is designed so that its price mimics the performance of the Down Jones Industrial Average, the S&P 500 or the NASDAQ.? This assures you that when the whole ?market? is up (meaning the stocks in the index are rising in price on average), your profits will be growing too.?Index funds can save you from picking individual stocks that might not perform as well as other stocks.?Funds are easy and convenient, but?not quite as financially rewarding as investing in a winning company that beats the market averages.
Indexes can having long losing streaks, even if they go up in the long term (over the course of 20 or so years). If little changes over the next several years, even if there are no new recessions, it might seem like you are riding the market nowhere.?You may end up cashing out with the same amount you put in years before.?That might seem unlikely, but it definitely seems like more of a possibility as the economic stagnation continues.?Also, you could end up without profits if you are unlucky and have to cash out during a future downtrend.
One strategy for avoiding the market’s bad moods is to invest in solid stocks when you feel that they are under-priced (this is especially likely to happen in a sluggish market like the one we are currently experiencing). Or perhaps a company has a setback that may be temporary: such as when Steve Jobs stepped down from the head of Apple Computer or when a company like Best Buy suffered as its sales went down during the recession.
You’ve probably seen news about this type of phenomenon even if you didn’t know it. The story might begin with something like: ?investors scrambling to sell after So-and-So Company announces that earnings for the quarter were less than expected.?? Most of the people doing the selling of that solid-but-sluggish stock are from institutions that handle mutual finds, hedge funds, or retirement accounts.?They own a lot of that particular stock, so when they sell, the price will fall. So you can watch and wait for the time when you feel that the price is right to buy.
If you aren’t sure when this is, there are various technical and mathematical tools that pros use to calculate the? volume of a stock’s sales and also the momentum with which the price is changing.? With a little practice, you can use these (they are generally available for free on many stock trading platforms) to make a better guess about when this quality stock reaches the bottom and starts going back up.
If you use this approach, there is another important step: doing your homework so that you can be sure that the solid company that you want to invest in is still a solid company. It can pay to have a?bit of knowledge about the company and its industry.?You need to make sure that the company is still solid, that it still has a competitive edge, and that it does not have any internal strife.?Steve Jobs stepped down at Apple for health reasons. Had he quit because he was in disagreement about the direction of the company or its finances, it could have been a sign of internal strife ? a clue that the company was in more than a mere slump.
Other examples of companies in trouble could be record companies who were unable to compete with iTunes and still wanted to sell CDs or camera companies like Kodak who fell behind in the digital photo revolution.?It pays (literally) to make sure that your solid company isn’t experiencing a complete failure.?Luckily, catastrophic failures are rather rare, so most times, it is mere fluctuations, not complete destruction of the company, that is the cause of a well-run company’s price drop. However, it pays make sure that you are not buying into the next Enron.
While it might seem like a good idea to put your money into the market now, it is always wise, whether the market is up or down, to find a solid company to get behind.? If you take the time to find this kind of company and do your homework on it, you can beat the market averages and make a profit, sometimes even if the market is going sideways or down.
About Josh Lew Josh Lew lives in the Midwestern US when he is not traveling. He is a columnist for Gadling and has contributed to Hackwriters and Skive Magazine.