Take it as red, too much of the carmine means trouble ahead
When you talk about "timing", most investors, especially conservative, pension-phase and long-term investors looking for a return think "timing" means trading and trading has an image problem.
They think it means a "short-term" soul-sucking, life-wasting activity for manic obsessives with sunken eyes, pale complexions and McDonald's mayonnaise dripped down the front of their T-shirts.
And, truth be known, even the less conservative investors, people in the accumulation phase, in their 40s and 50s, people who are still working and have a higher risk profile don't want to trade either.
Not because they have some philosophical objection but because they are busy, have jobs, have kids and don't want to spend the evenings or weekends looking at a computer screen again.
In most cases they have also tried their hand at trading already and while they may have had the occasional success, it was a bit of an insult to their intelligence, their household budget, their school fees and their mortgage responsibility to pretend it was anything more than a rather irresponsible if not stupid gamble that put far more money at risk than the odds warranted, just because it was called "investment" instead of betting. Agree.
Trading, actually trading on charts with all the technical education and trading skills you will need, can't be done part-time and other than those with an intellectual interest few want to do it full-time. Which leaves the average SMSF investor in a bit of a quandary.
The GFC taught you that "set and forget" is dead and you accept that, but you don't really want to trade, don't have time to trade and are not prepared to learn how to trade.
So what do you do? The answer is this, "Trading Lite". This is the art of timing stocks for investors.
As an investor you basically want to keep doing what you're doing, buying stocks for the long term with the intention of holding them forever, but you want to avoid two things: (1) getting a stock completely wrong a la Babcock & Brown and ABC Learning, or (2) avoiding a GFC-style "market" event.
Sounds simple, but despite your best intentions you will absolutely not be able to avoid either of these events until you change the habit of a lifetime and learn to do something you are particularly useless at. To sell. The horror!
The sharemarket is not about buying and never selling and it is arrogance in the extreme to assume that you can make an assessment of a company on the current incomplete and ever-changing information and get that stock right forever after.
You are bound to get it wrong and denying that by never selling is unintelligent. Of course things change and if some old Warren Buffett misquotes and your pride and arrogance prevent you from changing any decision you deserve to get caught. So step one is to accept that you are not that smart, will get some things wrong and will occasionally sell.
The final step is to work out when you sell. My advice on this is the same, whether you are worrying about a particular stock or the whole market. Do it on a stock-by-stock basis.
On your SMSF equity spreadsheet you have a column that shows how far the stock is up or down since you bought it. Now add a column called "HIGH". Every day or week or whenever you open the spreadsheet, look up the highest price the stock has hit since the last time you looked. Type it in.
Unless it hits a new high you leave it. In the next column log how far the current price has fallen from that high. Put a conditional format on that cell that turns the cell red if the fall is more than 10 per cent.
If you open your spreadsheet and there aren't any red cells, go back to your life. If a cell turns red, ask why. One red cell for one week means you may have got a stock wrong, one red cell for a few weeks means you have got a stock wrong and lots of red cells for more than one week means you've got the market wrong.
Red cells that last more than a week mean you are "constipated". See how long you can ignore them.
Frequently Asked Questions about this Article…
'Trading Lite' is a strategy for timing stocks that allows investors to continue buying stocks for the long term while avoiding major pitfalls like choosing the wrong stock or getting caught in a market downturn. It's a way to manage investments without the need for constant trading, making it ideal for busy investors.
'Trading Lite' is a strategy for timing stocks without the need for full-time trading. It allows everyday investors to continue their long-term investment approach while avoiding major pitfalls like getting a stock completely wrong or missing a market event. This method helps investors make informed decisions about when to sell, without the stress of constant trading.
The Global Financial Crisis (GFC) demonstrated that 'set and forget' is not effective because markets can change rapidly. Investors need to be more proactive in managing their portfolios to avoid significant losses during market downturns.
Timing is crucial for SMSF investors because it helps them avoid significant losses from poor stock choices or market downturns. By learning to time their investments, SMSF investors can protect their portfolios from events like the GFC and ensure better long-term returns.
You can track your investments by adding a 'HIGH' column to your SMSF equity spreadsheet to record the highest price each stock has reached. Use conditional formatting to highlight stocks that have fallen more than 10% from their high, which can signal a need to reassess your investment.
You can use a spreadsheet to track your stock investments by adding columns for the current price, the highest price since purchase, and the percentage drop from that high. By setting conditional formatting to highlight significant drops, you can easily identify when a stock might need to be sold, helping you manage your investments more effectively.
If your spreadsheet shows many red cells, it indicates that multiple stocks have dropped significantly from their highs. This could mean you've made incorrect stock choices or that the market is experiencing a downturn, prompting a review of your investment strategy.
If your spreadsheet shows a red cell, it indicates that a stock has fallen more than 10% from its high. This is a signal to investigate why the stock has dropped. A single red cell might mean a temporary issue, but multiple red cells over time suggest a more significant problem with the stock or the market.
Selling stocks occasionally is crucial because it acknowledges that no one can predict a stock's performance indefinitely. Market conditions and company fundamentals change, and selling allows investors to adapt to these changes and minimize losses.
Selling stocks occasionally is important because it allows you to adjust your portfolio based on changing market conditions and company performance. Holding onto stocks indefinitely can lead to missed opportunities and increased risk, especially if a stock's fundamentals have deteriorated.
Decide when to sell a stock by monitoring its performance relative to its highest price. If a stock falls more than 10% from its high, it may be time to consider selling, especially if the decline persists over several weeks.
To avoid making poor stock choices, it's essential to stay informed about the companies you invest in and the overall market conditions. Using tools like spreadsheets to track performance and setting clear criteria for selling can help you make more informed decisions and minimize risks.
Not actively managing your portfolio can lead to missed opportunities to sell underperforming stocks, resulting in larger losses. It also increases the risk of being unprepared for market downturns, which can significantly impact your investment returns.
The GFC taught investors that the 'set and forget' strategy is no longer viable. It highlighted the importance of being proactive in managing investments, understanding market dynamics, and being prepared to sell stocks when necessary to protect against significant losses.
Busy investors can manage their portfolios by adopting 'Trading Lite,' which involves setting up a system to monitor stock performance and only taking action when necessary. This approach minimizes the time spent on trading while still allowing for effective portfolio management.
Balancing your investment strategy with a busy lifestyle involves adopting a 'Trading Lite' approach. This means focusing on long-term investments while using tools like spreadsheets to monitor stock performance. By setting up alerts for significant changes, you can manage your investments efficiently without constant monitoring.
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