What Is the Best Way To Invest Money When It Comes To Timing?
There are number of visions about what is the best way to invest money when it comes to timing? We describe the three most popular approaches.
There are different ideas about when you should invest in stocks. First of all, it is important to understand, that timing has totally different importance for long-term investors as it has for short-term and swing traders. The shorter the time frame, the more important is timing in conjunction with technical analysis, while for long-term investors fundamentals are the one that are crucial when undertaking investment decision. There is practically no bad time for traders, the only bad time is when there is no or to little volatility on the market. This somehow isn't the problem in latest years, since the financial crisis which began in 2007/2008. VIX volatility index is above average since that time and when the traders have both options, to go long and short, they don't really care in which direction the markets moves.
Investors are facing totally other approach. They do not short on the long run; at least they don't do it massively. Their portfolio more or less consists of long positions, for which they believe will bring above average returns in the upcoming years. Now the question is what is the best way to invest money when regarding entrance point? When should you start building your portfolio for pension or whatever your long-term investment goal is. Generally, you have three possibilities:
Best Way to Invest Money: Cost Averaging Method
By following this method, there is no best time to invest, since you should invest regularly over longer period of time, making the timing irrelevant factor, at least it looks like that on the first sight. But this is not the case. Timing is very important; the only thing this method does is it doesn't bother with timing in analytical point of view. This methodology is about investing in good and bad economic times. If you invest $100 every month and you do it in times of economic recession or if you do it in times of high growth, you will be averaging the buying price of your investments. The most important thing is, that you must be adding to your existing portfolio even when stock market indices are falling, when it is psychologically difficult to put some money aside and invest it in stocks and related instruments. By following this kind of the best way to invest money, there will be times when you will buy stock cheap and there will be times when you will buy them expensive, but overall you will be fine as long as you invest on the long run, over ten year or more.
Best Way to Invest Money: Going with the Trend
You have probably heard for the saying "Trend is your friend". Especially traders are very keen to the idea that you must invest in the direction of the market. If millions of investors are putting money in one stock, go with them. Do not be more smart than majority; only if you have important information the market doesn't know about it, which tells you to do the opposite. So, when you see million of dollars coming in to the market, join the crowd. You should follow the price and volume as the most important indicators showing you what and where it is happening. We know, that you might feel that you are buying a stock on the top, all time-high, but hey, as long as you are buying high and selling higher, you are earning money. Apple stock was worth around $200 by the end of 2007. Investors, who were buying this stock at that time, were surely buying on all time high. They did regret their investment decision in the mean time for sure, when the stock went down below $100 in the beginning of 2009. But today, this stock is worth around $400, just few years from the entrance in the Apple position. How many of you have doubled the worth of your portfolio in the last four years?
Best Way to Invest Money: Contrarian Investing
Another strategy to invest long-term is just the opposite of going with the trend. This methodology is telling you to wait for good buying opportunity and enter the market when everybody else is scared and don't have the guts to do it. This are the times when you will be buying cheap and will earn you extra dollars. The major problem is, that by following this approach, you should generally invest every four or five years, which is the normal economy cycle and when recession comes. And in times of recession, people are scared, they are thinking about how to disinvest and not how to invest even more. Besides, it is always difficult to tell, whether the recession is over and in what exact shape will be the recovery.
There are more or less four types of recession: V-shaped, W-shaped, U-shaped and L-shaped. V-shaped recession means that economy falls into recession very fast but also recovers very fast. W-shaped recession is many times also called double dip recession: sharp downturn is followed by temporary recovery, but then the economy falls downwards again, after which it recovery completely. U-shaped recession is an example of prolonged recession period up to above two years, which is also often connected with global recession. L-Shaped recession is the scariest, because when the economy steps into recession, it can last for up to ten years. Everyone that did not go through at least one recession while investing in the stock market is considered to be an inexperienced investor. But if you survived many recessions, you are probably rich today, just like Warren Buffet is. His approach is very clear: "Buy low, sell high!".
What do you think is the best way to invest money?
Written by: Goran Dolenc
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