April 17, 2009, 5:00 am

Do You Really Have To Know Anything To Make Money On The Stock Market?

by: The Financial Blogger    Category: Investment, Market and Risk
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cluelessThis is actually better if you don’t know much…

The problem with human beings is that when they think they know about something, they start taking riskier decisions thinking they can “control” the risk by their mental power ;-). Therefore, we have a tendency of diminishing a real risk simply because we think we know enough that it won’t happen to us (after all, it always happens to the others… right?).

The more we know about the stock market (especially if we have been able to make money on the stock market in the past), the more we tend to complicate our investing strategy thinking that we can time the market for example.

So People are now trying to figure what will be the best timing to invest their money in the stock market in order to benefit from the boost but not lose a penny in the meantime. Since they have been right about the previous crash when they sold everything last summer, they think they can be right again.

I read an interesting article about this the topic of market timing and how to make money on the stock market. Actually, making money on the stock market is quite easy; simply invest in index funds or ETF’s on a regular basis… You will never hit the bottom and you will never buy too late. You will simply be invested all the time. How does this reflect in the real world? Let’s take the example of the Great Depression back in 1929. Do you think that one could have make money on the stock market back then? Well they could!

If you look at the Dow Jones Index during from 1929 to the end of 1935, its yield was a big fat MINUS (-) 47%. However, someone who would have invested on a regular basis during those 6 years without trying to time the market would have made a big fat PLUS (+)45% before dividends.

So investing periodically (dollar cost averaging) is probably one of the greatest powers besides the power of compounding interest to make money on the stock market.

image source: flickr

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I’m with you. Only “professional” or semi-pro investors should try to do much more than investing their money into index funds with some sort of allocation formula.

There’s two kinds of market timing – avoiding losses because the market is going down now (I just saw a headline the other day saying mutual fund sales are down this year, causing many people to miss the rebound in the last month!) and avoiding losses because the market is going up and may come down eventually.

The second kind is more likely to be successful, although it has risks of its own. This kind of timing can help to adjust your asset allocation if you don’t want to buy and sell everything at once. Day-to-day trading is another matter – it’s hard to do unless you have a lot of time and a lot of money you’re ready to lose 🙂

Silicon Prairie,

the problem is as big in the first method in market timing than the second. In the recent years, when would you have left the market? in 2006 when Jarislowski started saying that it was going side ways? or in 2007 when everybody was expecting to get the oil barrel at $200 within 12 months? or early in 2008 while most people were saying it was only a “normal” correction of 10%? Or simply too late in 2008? Nobody knows when it’s the bottom or when it’s the peak… we only know a year after ;-0

Good post. Reminds me of an online investing contest held by one of the financial sites in which “professional” brokers competed against each other and also against a “monkey” which was basically a computer that randomly chose investments. The monkey actually came in second….

Obviously in the short term everything is possible but I definitely agree that dollar cost averaging is one of the best investment strategies for households. Don’t be tempted to time the market.

by: The Financial Blogger | April 18th, 2009 (7:25 am)

can we lease this monkey? hahaha!

You don’t need to leave the market completely – as The Four Pillars of Investing demonstrates, you can estimate when the future returns are likely to be lower. In this case you might want to consider reducing your allocation, just like if you were holding a stock fund that shifted to holding mostly bonds.

I first read this when I still believed that stock markets could return an average of 10%/year no matter what; it changed a lot at first, but fortunately the future prospects have improved quite a bit since then. A better example than the recent years is 10 years ago. You can always keep a bit of money invested in case it turns out that there is a good reason for the valuation, but every investment should be judged on the same basis of what you’re actually getting for it. If it’s not very much, you can’t expect people to keep paying more and more for it in the future.

[…] Blogger says you don’t have to know anything to make money on the stock market.  This is true but you also don’t have to know anything to lose money […]

Very interesting idea bout the ‘risk control’ concept. Well written article!