Wondering when to buy stocks? It’s a smart question. Luckily, the answer can be relatively simple.
Figuring out when to buy stocks is a little like trying to figure out when to go on a road trip. There are some different approaches. You can hit the road whenever you want, take back roads, and stop anywhere that piques your interest. You can plan to leave after dinner and drive all night, thus avoiding most heavy traffic. You can time it, so you miss rush hour in any major cities you may go through.
You can probably imagine there are several “correct” answers here. Part of the equation is personal preference. But you could also do some analysis. Is there a lot of nighttime construction on your route? Maybe you’ll opt to try timing your drive to avoid Washington D.C. at 4:30 on a Thursday afternoon. (If you’ve been in that traffic, you’re probably shaking your head yes right about now.) You could even look at the weather and determine that driving through a blizzard from Boston to Rochester is not a great idea, and maybe you’ll just stay home for now.
Determining when to buy stocks isn’t that much different. Or maybe it’s more fair to say parts of the process are similar. You can plan on slow and steady, not worrying about the ups and downs of market blips. You can try to time the market and give yourself a mostly smooth ride. You can hold onto your cash and sit out a particularly bad market correction. Here’s a look at the map for these strategies.
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3 Strategies for deciding when to buy stocks
1. Dollar-cost averaging. Our first strategy is dollar-cost averaging. To stick with our road trip analogy, this is the slow and steady approach. We’re not worried about trying to time anything or throw a bunch of cash into the hottest new IPO. This is a long-term investing approach. At its base is the idea that you put a pre-determined amount of money into your portfolio every month, and put equal dollar amounts into each of your stocks. You’ll end up with more of some stocks than others. You’ll buy some stocks when they’ve gone up in price and some when they’ve gone down. But overall, you have equal dollar amounts invested across your portfolio.
2. Market timing. A more active approach in determining when to buy stocks is to use a market timing strategy. This just means you buy stocks as they’re going up and sell them before they go down. This is the “avoiding rush hour” idea. You will, of course, not be perfect. But ideally, you’ll get it right often enough that you can build up a healthy profit. We have several market timing indicators we use here at Cabot. The key here is that market timing is a stock market tool and not specific to individual stocks. However, using this indicator in conjunction with a stock’s relative performance line, which measures a stock’s performance relative to the market as a whole, could give you significant insight around when to buy stocks and when to hold your cash.
3. Holding cash. Whether it’s your retirement portfolio or an account you’re using to save money for a new home, the way you make money in the market is through investing. Any money you have in your account that’s not invested isn’t doing much work for you. Here’s the catch, though. It is entirely possible to lose money in the stock market. Yes, when stocks are going up, you’re money is working for you. But when they’re going down, you are losing money. In that case, you’re better off holding cash. There is a lot to say about this, but the basics are this:
- Don’t stress yourself over small up and down price movements. They happen.
- Watch the trend. Determining when to buy stocks, or when to sell them, isn’t so much about keeping up with every little dip. It’s about watching the overall direction of those stocks.
- Look at percentages. Dollars are important, yes. But a one-dollar change in a $100 stock is not as significant as a one-dollar change in a $10 stock.
- Decide ahead of time how much you’re willing to lose. Why? Because when that stock loses, say 15% of its value, you’re selling it. It’s cold, it’s hard, and it’s a real bummer when it’s a stock you love, but the market doesn’t care. It’s always disappointing to lose money on an investment. But given a choice, losing 15% or 20% is preferable to losing everything. And yes, you will sometimes sell stocks only to watch them rebound. That’s not much fun, either. But again, we’re looking at the long-term here. You will find another outstanding stock that will treat you well.
- Cash is good. Lastly, it’s always nice to have some cash in your portfolio so you can jump on a good deal. Turnaround stocks and value stocks pop up regularly, and if they fit your portfolio, you want to be able to take advantage of those opportunities.
How do I decide which strategy is best?
The truth is that most investors mix and match their approaches to investing. One portfolio might consist almost entirely of blue-chip ETFs, with a portion set aside for speculative stocks. Others may use dollar-cost averaging for value stocks while trying to time the market on a selection of growth stocks.
And we haven’t even gotten into the different approaches to selecting stocks! The point is, there’s more than one right way for you to decide when to buy stocks.
Not sure where to begin? There is a lot of free advice on our website and several free reports to download and read. And when you’re ready, we also offer a wide range of award-winning investment advisories where we share the latest investing information and tips.
How do you decide when it’s the right time to buy stocks?
