Given the volatility of the US and Global stock markets over the past week one has to wonder if the people/institutions who did all of the selling last week are they same ones doing all of the buying now, or is this new money coming into the markets that was somewhere else two weeks ago? The reason why I ask is what would be the point of selling your positions only to buy them all back once the market turns a week later? Who benefits other than the brokers? In hindsight wouldn’t have holding onto your positions been the best strategy?
Either nobody knows… or nobody cares. That’s fine, I’ll take my ball elsewhere!
This is why I don’t understand everybody bitching about all of the selling. So many times I’ve seen people online say “just ride it out, the price will rebound.” No shit, the hope that the price will rebound is exactly the argument for not “riding it out.”
Step 1) You know the market is actively crashing, and sell your 100 shares at $5 each. This sucks, because they were worth $6 each yesterday. Oh well.
Step 2) After x time, the price stabilizes, and even begins to rise again. You spend your $500 earned from the above transaction, and buy 500 shares at the current price of $1 each.
Step 3) After y time, the price is now similar to where it was before the crash, but you now own 500 shares instead of the fool who “rode it out” and still only has 100.
Of course the same people buying today are the same people who sold yesterday.
That only works if you time the market right… twice. I don’t think most people sell early enough when the stock starts to go down or buy at the bottom before the market heads back up. Day traders might be able to do that but most people don’t know it’s a correction until the stock has already dropped significantly.
Except the range is rarely that much and you have to pay brokerage fees on both transactions. In a perfect world people with enough time and knowledge can spot the market crash and take action. Most folks don’t really know what’s going on until the crash is in full force and aren’t able to sell with the majority of the value intact. Or they have mutual funds and expect their fund manager to do those things.
If one is that good at knowing what the market is going to do, why not just sell before the crash begins? 
Oh to be a perfect timer!
It really can’t be predicted - that’s why there is a market - buyers and sellers - opinions galore.
What can you do? Dollar/cost averaging. Example: Market/economic crash from 2007/2008 or pick the Dot-Com crash; doesn’t matter. People can panic when they see large swings downward. Many of my fellow employees sold out of the equity market toward the bottom and bought “safe” government securities yielding - next to nothing. Those of us who continued to contribute the same percentage to equity purchase saw our money purchase increasing number of shares as prices dropped and benefited handsomely on the recoveries.
BUT WHAT IF IT GOES DOWN FOREVER? :eek::eek::eek: Won’t matter - we are all in for a world of shit in that case.
What I see exacerbating the market swings lately are:
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24 hour news/opinion services spouting everything from doomsday predictions to rainbows and flower petals. Doomsday sells more ads so I (YMMV) perceive a negative bias. Kind of like attack ads in politics. Peoples is gullible. Gold anyone?
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Computer algorithms driving market volume and momentum swings. The large investment houses/funds invest heavily in high-speed trading to capture nano-second swings in pricing. Computers analyze speeches by market makers word by word to divine plus/minus scores for actions about to be taken. Other computers look at what other computer driven programs are doing and react accordingly. There’s not a human in the loop for much of this trading. It gets harder to correct market momentum when our computer overlords think Yellen sounded a little hoarse after the last Fed meeting.
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There is less actual investment research being done - talking to CEOs, CFO’s, tracking expenses, inventories, earnings, etc… booring. Just fire up the computer.
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Short term thinking. Too much emphasis on weekly/monthly analysis - most of which is just noise. Companies can “cook” the books in the short term to make things look rosy. See a history of LUCENT before the Dot-Com drop (not my finest investing moment). While rain in the midwest is important during the corn/soybean season - a line of thunderstorms should not be setting off market moves.
This is a sucker’s game and your strategy will significantly underperform those that just ride it out.
Whew! I was hoping someone would say that.
Like I was told when I was a wee lad o’ 30: Stock market is like a roller coaster. You’ll only get hurt if you get off at the wrong time.
But actually I’m still fond of the perspective, when a market takes a header: Ooooh look! Stocks are on sale! Take your cash reserve and stock up. When the market recovers, you collect your winnings at your leisure, and set it aside as cash for the next dip…
Who are “the people/institutions who did all of the selling last week” selling to?
The US stock market alone is worth about $20 trillion, less than 5% of stocks are traded in a day, and every sale has to have a buyer and seller. If enough people believe a stock/s, sector/s, or index/es are overvalued the price will come down, or some might be second-guessing what the market will do and will be shorting a stock/s, sector/s or index/es.
There are umpteen ways to value a stock/s, sector/s or index/es fundamentally and then you also have, added into the mix, traders relying on patterns they see in charts, tea leaves, star signs and whatnot.
What is true is trying to time your entry/exit points can mean being out of the market on huge upswings, which can negatively effect long-term returns on investment, and probably give you an ulcer or worse. What is also true is at least 95% of traders never return a profit in the long-term, and the other 5% have inside knowledge and are acting illegally or just lying.
As others said, it’s difficult to time the market correctly. Even if you assume that some people can time correctly, that just makes it more unlikely that you will – it’s a constant-sum game, after all. For example those who sold Monday morning hoping to buy back at a lower price were disappointed. (Or maybe not. Maybe there will be a lower price next week or next month. I don’t know, nor do I know whether such a low price would provide a good time to buy.)
Commissions these days are essentially negligible, but there is another reason to avoid trading. Suppose you bought JNJ years ago for $15, and now sell it at $95 so you can buy it back at $90. Yes, you’ve made a $5 profit, but the need to pay tax on $80 of capital gains will eat into your funds. (You can avoid the tax by “selling short against the box” but these days you probably need to fill out two forms and get a note from your doctor before the IRS will allow that! :rolleyes: )
Automated trading adds to the volatility - computers programmed to buy/sell on certain trigger points. It’s not hard to see that a strong down will trigger computer “Sell!” orders, which then contribute to the drop. The markets have added controls, such as delaying feed of information to slow computer trading when the drop is too far, too fast.
Also, a lot of trading is mutual funds. The managers are not trying to “get rich quick”, they buy and sell based on formulas - X% tech, x% resource, X% transportation, etc.: so much money comes in/goes out, but the stocks whatever they are at. The only measure is not “making money?” but instead “beating the averages?” Even worse, some funds do not buy on fundamentals, but more on “we need X% of each of the top 10 companies in the industry”. As a result, a rising/falling dud will drag along the entire sector, as the funds buy or sell everything in that sector in reaction to the change.
I think the reason people make the mistake that Whiskey Dickens does here is because in retrospect things seem obvious.
The market goes up/down and looking back at it all sorts of Smart People (think they) can pinpoint the exact reasons why it went up to this point and went down to that point, and it looks like something you can appreciate at the time.
Even beyond that, even the levels of the market at the top/bottom seem in retrospect too high/low. Looking back at the dot com bubble (for example) it seems obvious in retrospect that those prices were speculative and way too high. But a lot of Smart People at the time didn’t think so, obviously, and it’s foolish if tempting to think that you can be any smarter.
The trouble with selling on drops is you can get caught out when traders “run the stops” triggering a cluster of stop-loss orders and engineering a flash crash. Look at the action on Apple on Monday, which had closed the previous Friday at $105.76. On Monday it traded as low as $92.00, and ended up closing at $101.58, so people that held on took a $4.00 haircut, but some people trading out of it lost more than $13.00a share. The action on General Electric was similar, low open, precipitous drop to trigger the stop loss orders, then a quick recovery.
Thanks everyone. I can see why someone might think they can time the market and make a bundle selling on the down, waiting, and then buying on the up, but I still think holding and dollar cost averaging is just as good a strategy in the long run and requires a lot less time, effort, stress and downside risk. I personally can’t afford to sit at my computer all day watching all of my positions in hopes of catching the ups and downs at the right time since I work for a living. It’s just good to know I’m not leaving too much money on the table by doing so.
One thing I do is concentrate on dividend paying stocks, and then I take the viewpoint that collecting dividends is like collecting rent payments. If I own a $100,000 house that I’m collecting, after expenses, $4,000 a year rent on, and there’s a real estate crash, and that house is suddenly worth only $70,000, would I run out and sell that house?
Not as long as the rent keeps coming in. Hell, I might buy another one. The dividends are like rent. They protect you against market fluctuations.