Tips to ‘Timing the Stock Market’
Now that the title of this article has grabbed your attention, is there a ‘bad’ or ‘good’ time to invest? Is there a ‘science’ to timing the stock market? Consider the following and if ‘timing the market’ is a good investment strategy for you:
Tip #1 Invest- Whether you invest at the ‘top’ or ‘bottom’ of the stock market (price per share), just investing in the stock market can make a positive difference when you have ten or more years to invest. Not investing in the stock market will yield little, or no return on your investment when adjusted for inflation.
Tip #2 Watch for Market Shifts- Bull Markets (stock prices rising) last longer than a Bear Market (stock prices falling), in fact they last four times longer. Watching for a Bull Market provides you an opportunity for growth in your portfolio. Consequently, a Bear Market provides you an opportunity to purchase stocks at a lower prices per share than previously, but can make it harder for you to pick profitable stocks due to market conditions.
Tip #3 Take Advantage of a Bear Market- Investing at only stock market peaks versus only at stock market troughs produces a worse overall return over a period of 20 years or more. It pays to buy shares at a lower price by purchasing more during those times.
Tip #4 Consistent Investing Produces a Higher Overall Return-Commonly referred to as Dollar Cost Averaging, involves investing consistently (ex. monthly) a fixed dollar amount over a long period of time, such as 20+ years. Timing the stock market and only participating during certain conditions does not yield as high of return as investment consistency.
If investors emotions were not at play in the investment process, investment consistency and monitoring would outweigh ‘timing the market’ over a long period of time and produce higher returns. For additional information, visit Investopedia’s article Buy and Hold Investing vs. Market Timing.
An investment strategy involves consistency, monitoring, and an overall plan to achieve the goals that you want to achieve. By working together to develop and implement a financial plan, we remove the ‘timing factor’ that could impact your portfolio. Feel free to call our office if you would like to schedule a meeting.
American Financial Literacy
In December 2016, FINRA (Financial Industry Regulatory Authority) released their report, “Investors in the United States 2016”. The results of the study indicated that overall, American investors felt ‘confident’ in the stock market and the economy, but many felt they didn’t have a good understanding of basic investment principals or basic financial concepts.
One of the most serious findings in the study regarding financial literacy, was that when asking study participants to answer ten basic questions relating to financial concepts, those that felt confident about their financial literacy scored less than 50%! Those that indicated they were not confident and didn’t understand basic concepts scored slightly worse than the confident investors. This shows that overconfidence doesn’t necessarily mean understanding.
What does that mean for us as a society? Numerous reports indicate that if we don’t teach our children (and Adults) financial literacy, there will be consequences that will hurt our country for years to come. A few key things we need to consider:
Requiring a Financial Literacy Class to Graduate. Currently only 17 states require a financial literacy class to graduate from high school (Latest study released in 2016). No states currently require standardized testing of basic financial concepts. Financial literacy experts know that teaching students how to manage their income and expenses and giving them a basic understanding of financial concepts will enable them to have financial successes regardless of their future income.
Credit Scores Improve After a Financial Literacy Class. Having trained teachers that know financial literacy content help students develop better credit behaviors in childhood. This leads to students that are likely to make on-time payments and understand how to manage debt and credit.
Bring Financial Literacy to the Work Place Improves Participation in Retirement Savings Plans. When employees are invited to attend work place classes on budgeting, saving, and investing, they are more likely to save for retirement and not live beyond their means. These classes are commonly conducted by the financial advisor that oversees the company retirement plan, the HR Department, and other financial literacy educators.
What can you do for yourself if you feel you are in need of sharpening your financial literacy? Start by asking questions of a financial advisor or another capable instructor when you don’t understand something. This can include asking CPAs, literacy teachers, and others that specialize in educating with unbiased intentions. It’s up to all of us to improve the statistics we are seeing in our population regarding distressing facts on where we lag in comparison to other countries in financial literacy.
Time to Play Retirement Account Catch (up)
If you’re approaching retirement in the next fifteen to twenty years, it may be time for you to focus on saving more. Playing ‘catch up’ by contributing more can make a big difference. It’s never too late even if the time line is getting closer. It’s always better to try to put away more than to not try and face the reality of working longer, which may not be what you wanted. Many situations can cause early retirement even if you’re not financially ready, so make a plan to be proactive.
Catch up on additional payments now by increasing your contributions to your company retirement savings plan, and Roth IRA; even adding 2% can make a difference over time. If you’re contributing the maximum allowed contributions, congratulations! If you’re not contributing your ‘max’ start with small steps and the 2% this year. Remember you can increase your contributions at any time, you don’t have to wait until the next benefit meeting! If you have the ability to set your contributions on auto-increase, set that into play so that next year and going forward you’re increasing 1%-2% each year.
Utilizing the IRS’s ‘catchup provisions’ if you’re 50 or older is in your best interest, if you’re not already doing so. You’re allowed to contribute an additional $1000 into IRAs, and an extra $6000 into 401(k)’s. Other self-employed and solo 401(k) type accounts also have increases this year, so consult with me to determine if you qualify to contribute more.
Playing catch up can benefit you once you start putting into motion steps to increase your savings. For a basic calculator on how it can benefit you, utilize Bankrate’s Traditional IRA calculator to give you an estimate of how your increases can impact your savings. Use a lower, realistic rate of return on your initial calculation.
Additionally, plan for us to meet for a financial planning meeting if we haven’t already done so. Planning for contribution increases can be applied into the financial plan, and seeing how that can benefit you with no increases versus increased contributions, can be a motivator to get your game started.
First Job or New Job? Sign up for Employee Benefits Immediately
Perhaps you’re going to be a new graduate, or maybe you’ve decided to switch jobs. Whatever your situation, a new job is a new opportunity to find out everything you can about the employee benefits they offer you. Some benefits may be covered 100%, others may be at your cost but evaluating what is best for you is important. Consider these things to sign up for as soon as you can:
Life Insurance- Even if you’re single or within 10-15 years of retirement, consider the life insurance options available to you. Many time an employer automatically pays for life insurance policy that is one or two times your annual income. You do need to sign up to take advantage of this benefit. There may be additional insurance that you can purchase through paycheck deduction at your cost. A new job provides you the opportunity to protect yourself even more. Make sure you understand if this insurance ends when your work position does or if you can continue coverage.
Disability or Income Replacement Insurance- A disability insurance plan is commonly offered by employers, but not subsidized by most employers. This is coverage that will protect you if you can’t work due to an injury or illness. Don’t think that Social Security Disability will help you immediately because there is the ‘period of proof’ that you can’t work (up to six months), and it may be up to 24 months since the injury before benefits start. It’s a good idea to consider this benefit.
Health Insurance- Make sure you’re covered by choosing the plan that makes sense for you and your health history. If dental, vision, and prescription drug coverage are an additional option, determine your needs. Many times health insurance is paid by the employer entirely for the employee, and at additional cost to the employee for additional family members to be covered.
Retirement Savings Plan- Participate in your company’s plan at least enough to get the employer match. Consider additional increases over time and the addition of any other savings plans that your company provides in order to help prepare you for retirement.
By participating in the benefits that are available to you through your employer, you can save financially because the employer picks up part of the cost. By no means are these benefits all you should be doing; you may have a need for other coverage outside of work. By reviewing life insurance, disability, and retirement savings plans you have privately, I can assist you in determining if you are well covered between what you have and what is offered.