Stocks represent ownership in a publicly traded company. Making extremely high returns on our investments is all about timing. If we take a market crash and recession as an example, it is merely an opportunity to make a fortune if we were to time it perfectly.
This is why there are so many tipsters and journalists trying to speculate on the near future – they’re preying on this thirst for timing things.
But the fact that this is true doesn’t make it possible. And the fact that it’s so alluring is the very reason why we must resist the urge to time things. Time in the market, as they say, beats timing the market.
Why Timing the Market is Impossible
There are two ways to explain why timing the market is impossible. Firstly, through logic, and secondly through empirical data.
Logically, the reason why we cannot time the market is because of something called Wisdom of the Crowds. This is a theory that explains how the consensus of a population is far more accurate in their guesses than any one individual can be. For example, farmers guessing the weight of cattle can be done within 1lb of accuracy, beating any individual expert farmer.
The same goes for buying stocks. It’s a fallacy that we need to be better at predicting the market than the average person (i.e., being better than 51% of the traders participating). This isn’t enough. We actually need to be better than the consensus, which is the price itself, and according to Wisdom of the Crowds, this means even being better than 90% of your peers likely still isn’t good enough.
It’s important to know that the current price of stocks reflects future factors. For example, you’re not the only one anticipating a recession – this threat is already factored into today’s price. You can read more on Efficient Market Hypothesis to further understand this.
Secondly, it’s proven empirically time and time again that lump-sum investing is better than buying the dip, even if you are super accurate in your timings. This is because that during the time you’re waiting for the dip, the lump sum investor is making continuous gains. Before any bear market is a bull, and it can be a long one at that. Stocks take the stairs on the way up, and the elevator on the way down.
Stock Picks: Which Stocks to Choose?
So, now we know not to try and time the investments, but rather to stick with them for a long enough time to outlive dips and fluctuations, thus reaping the reward of long-term growth.
Embracing this strategy actually helps us rule out a ton of stocks for our stock picks. High growth usually means high volatility, and because we’re in it for the long haul, those short-term meme stocks become redundant. No one could possibly argue that Bed Bath & Beyond Inc. (BBBY) at $25 was one for retirement. And, if it’s not for the long-term, we should disregard it.
So, these somewhat favours value stocks overgrowth stocks; these are stocks that are considered to be good value for money, safe, and sturdy fundamentals. Essentially, not the fast-growing volatile tech stocks that are difficult to justify for the price besides the narrative of “well it will continue to grow anyway”.
Value stocks are often dividend-paying, and dividend stock are evergreen. Evergreen means that it is not under threat of becoming obsolete or out of fashion anytime soon. For example, eCommerce, Energy, and Engineering. Generally, dividend stocks fall into these categories.
Stock picking is a difficult skill, which is why it’s better to have a good mix and diversify across industries. Which strategy sounds more stable for long-term growth: having 100 fairly priced dividend stocks across 10 evergreen robust industries, or having 10 volatile expensive growth stocks all within tech? The more picks you do, the risk each individual one poses to your portfolio. This is why index investing is so powerful, too.
This is also conducive to having a passive income. Dividend stocks not only make for a less volatile portfolio, but they can create a passive monthly income for you. And you’re in less threat of dividends seizing up during a recession if you’re involved in evergreen industries with big, stable firms – many succeed in paying out during dips and recessions.
Passive investing will eradicate any desire to even succumb to the pressures of selling and timing markets – the anxiety underlying that pressure is minimal compared to high-risk growth investors. No more FOMO; no more anxiety.
Buying the right stocks at the right time requires a combination of thorough research, disciplined decision-making, and a clear understanding of your investment goals. By focusing on fundamentals, staying informed about market trends, and avoiding emotional biases, you can position yourself for success in the dynamic world of stock investing. Remember that investing carries inherent risks, and seeking advice from financial professionals can provide further guidance tailored to your unique circumstances.