Buy low, sell high. It's not a difficult concept. It should be easy to make money if you follow this simple rule. Just wait until the market is low, buy your investment, and wait until the market is high to sell.
The trouble with timing the market is that we're just not that good at it. When is the market low? When is the market high? Pick a spot on a market graph and you'll discover it is likely both low and high. You just don't realize it in the moment. You are only aware of it when you look in the rearview mirror.
Take February 2020, for example. The market was at a high. You might think, that was a terrible time to buy. If you bought and immediately watched your investments drop in March, you probably felt like you made a mistake. But relative to the market in 2024, it is lower. You have likely made money if you invested in February 2020. So which is it, high or low?
Market Timing Psychology
Additionally, our psychology gets in the way. Say you buy an investment and it is growing. You've doubled your money. Do you sell and lock in your gains? Or do you think to yourself, what if this is just the beginning? What if this is Feb 2020 Tesla stock, and I'm about to be rich? What if the stock crashes, are you inclined to buy more because the stock is now low?
Realizing that the market is often simultaneously low and high and that our psychology works against us may make you feel paralyzed. How can anyone possibly invest? So now you see the trouble with timing the market.
Let's focus on some tips to help you avoid trying to time the market.
Dollar-Cost Averaging
Dollar-cost averaging is the practice of regularly contributing and investing, regardless of market activity. You may already do this if you invest in a retirement account every paycheck. You can do this in an IRA or taxable brokerage account as well. Automating your investments is an excellent way to take yourself out of the equation.
Diversify
Some people may enjoy (and even be good at) day trading, but it is not a reliable way to grow your wealth. If you do decide to invest in individual stocks, you'll need to do a lot of research on the company. Don't invest in individual stocks unless you can afford to lose that money. Invest most of your money in diversified index funds and ETFs with low expense ratios.
Diversifying your investments through index funds allows you to spread your risk across multiple companies. If you are invested in non-correlated investments (investments that are not influenced by the same things and do not move together), you reduce your risk even more. The more diverse your portfolio, the less likely you are to have all of your investments crashing at the same time.
Rebalance
Develop an asset allocation plan for your portfolio that you believe in. Understand why you have chosen certain investments in certain percentages. Once you are confident you have a solid plan, just focus on rebalancing.
Rebalancing tricks your brain into feeling good about selling winners to buy underperforming investments. You focus on bringing your portfolio back into balance rather than on what the individual investments are doing currently or might do in the future.
Double Dip
Fear of missing out on bargain prices might still be bothering you. Remember that time in the market is more important than timing the market. However, if you want to take advantage of the dips, use the dip as a motivation to contribute more than you usually would. Waiting for the perfect moment to invest your normal contributions could cost you, but contributing more than planned will rarely hurt you.
Keep It In Perspective
Remember that investing is a long-term strategy. The price fluctuations that seem big today will seem like a slightly upward line with minor blips in 30 to 40 years. Of course, past performance is not a guarantee of future returns, but that is what history has shown us so far.
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