How to Avoid Unnecessary Market Risk

I often read articles and hear people talk about how they will get rich by timing the market. On its face, it is very appealing because of the many individuals out there with ‘proven methods’ of getting rich by market timing. Some people do indeed make a lot of money, but the contrary is more real for most individuals.Today, I’m going to discuss the perils of timing the market.Perfect Timing. The first flaw with timing the market is that you have to make two correct decisions—getting in and getting out. If either of these decisions is incorrect, then you will end up with sub-par gains or losses.Emotion Adds Risk. Studies have shown that losing money takes a larger emotional toll than the feeling we get from gaining money. Most investors are not emotionally mature enough to handle the roller coaster of constantly gaining and losing money to get ahead—this usually leads to more aggressive trading and risky speculation.It Takes a Lot of Time. When I first started trading stocks, I would place frequent trades throughout the day to try to capture $0.05 here and $0.10 there. It would occupy most of my entire day, and my gains were usually marginal.Markets Are Squirrely. Sometimes markets are predictable, but many times they are illogical. Take the current market, for instance—the entire US economy has been shut down for almost a year, companies are permanently closing left and right, unemployment swings wildly, and yet the stock market is up to all-time highs. If I tried to time this market this year, I would have been wrong.The Numbers Don’t Lie. Since 2000, most individual investors have sold out of the stock market after it started declining and got back into the market after it started recovering. This is buying high and selling low—the exact opposite of what you want to do in the stock market.The best book I’ve ever read about investing is called Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts by Annie Duke. While this book was not intended to be an investing book, its philosophies have been beneficial when making logical investing decisions.One of the investing concepts that I took from this book is that we should follow the option with the highest probability of success. Sound investing is when you use your capital to get a return on your investment plus your money back at the lowest possible risk. Warren Buffet said that “risk comes from not knowing what you’re doing.”So before you invest your hard-earned money on high-risk schemes like day-trading and market timing, educate yourself more, or find a fiduciary investment advisor who can guide you. If you are in need of a little guidance, my office (Sterling Wealth Management) is here to assist you with your investment needs. If you want to schedule a free, no-obligation meeting to speak with me, please call me at 702-228-0500.