Market timing is very difficult task and often relies more on luck than skill. However, looking at stock market trends can often yield better returns as trends can guide buying opportunities and portfolio allocation. In this post we are going to explain two different ways to try and time the stock market when buying and also discuss how stock market trends and stock market cycles can influence when to buy stocks and portfolio allocation.

First off we believe that market timing is impossible in the short-term. If it were possible there would be more money running around than we can ever imagine. However, it is fairly easy to spot long-term trends and time the market over a longer period of time. History shows us that the most reliable gains are made through long term buying and holding. Warren Buffett has made his fortune from buying and holding strong companies with great price valuations. Taking that into consideration we can follow market cycles to find the most opportune times to buy into strong well priced companies.

Understanding long-term stock market trends can help determine opportune buying periods and also help guide portfolio allocation. Identifying longer term stock market trends is pretty easy. Our economy is either slowing, stable, or growing and there are numerous economic indicators to tell us how the economy is doing. Economic cycles can be used to our advantage by acquiring more shares near the end of a slowing economy and at the beginning of a growing economy. Inversely, that means we should sell or hold when the market is near the end of a growth period or starting to slow. You might think this is hard to do but it’s pretty easy when you look at a long-term GDP chart. Just remember that the stock market can swing widely in the short term creating very scary days. We want to concentrate on long-term trends and accumulating shares in strong companies at opportune times of the economic cycle.

Although we argue market timing is impossible in the short-term, there are ways to help get a better price when buying stocks. The best way to safely enter a stock is through Dollar Cost Averaging. This allows you to create a position in a stock with an average price over time. This can help protect your investment if that stock falls after you make your first purchase. Taking this a level further, it also helps to make purchases on a down day for the stock. This can help you get a slightly better price over time.

Look for the next edition of this article where we will explain economic cycles and how to identify different cycles. Sign up for a Free Trial and view the current Market Flavor market outlook and see where we are investing our money.

Tags:   Buy and Hold Strategy   Buying Stock   Economic Cycle   Learn How to Invest   Timing the Stock Market  

Posted on April 16, 2007 9:03 AM | Digg | del.icio.us