Stock Market Timing Guide for Beginners
How do you use Market timing techniques?
There are two basic market timing techniques used by some investors: dollar cost averaging and fixed amount investing. If you are investing in individual stocks, these timing techniques may not be practical for most individual investors. These plans can be very useful for timing mutual fund investments.
Dollar cost averaging is a strategy of investing the same dollar amount in the same investment at fixed time intervals. Investors usually have the option of investing in mutual funds in relatively small dollar amounts. So sometimes they will make an agreement with a fund to send in a fixed dollar amount every month to that fund. This adds discipline to their savings strategy, but it also could help the investor establish a better cost basis for the fund. When you send in a fixed dollar amount every month, you will buy fewer shares when the price of the shares goes up an more shares when the price goes down. so you end up dollar cost averaging your price per share. If the investment goes through a down cycle, you will be buying more shares while it is down, reducing your average cost per share over that time. If it goes up, you will be buying fewer shares at the higher price. You should note that if the price of the investment had only gone up after the initial purchase, you would have ended up cost averaging a higher price per share. But, of course, your would still be profitable.
Fixed amount investing is simply the strategy of keeping a constant dollar amount invested at certain time intervals, such as six months or a year. Using this strategy, you would sell shares if the total amount of the investment went over the original amount you put in, and you would buy more shares if it went down.
A variation of fixed amount investing is fixed ratio investing. This is a strategy often used by institutional investors to keep the same ratio of stocks to bonds in a portfolio at all times. Typically, someone who uses a fixed ratio investing strategy will keep 50 percent of his or her investment capital in stocks and 50 percent in bonds. If the stock portion of the portfolio rises, he or she will sell stocks and buy bonds to keep the ratio at 50-50. Vice versa, if the stock portion drops, the investor would sell bonds and buy stocks to keep the 50-50 mix.
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