How to Time the Stock Market

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There's one (real) rule on Wall Street.

There is one and only truism on Wall Street: “buy low, sell high.” In other words, buy a stock when it hits a low price per share, and then sell it once it reaches a higher price. Don’t take anything else any pundit or analyst says as gospel beyond “buy low, sell high,” because everything else is rooted in opinion, and no one’s opinion is right all of the time. Analysts’ best guess to try and predict the market’s future is ultimately just that: a guess.

While “buy low, sell high” works, there is an issue: no one knows exactly what the lowest low will be, and no one knows what the highest high will be. When you decide to buy a stock, you may be plagued with analysis paralysis: What if I buy the stock today and the price goes down tomorrow? Then I will have essentially missed out on a better deal and paid a higher price than I would have paid if I just held on a liiiittle bit longer. But, what if I wait to buy the stock and the price goes up tomorrow? Then I will have essentially missed out on a better deal and paid a higher price than I would have paid if I just acted a liiiittle bit more quickly.

You can have the same internal dialogue when it comes time to sell: What if I sell the stock today and the price goes up tomorrow? Then I will have missed out on the chance to earn more money by selling my shares when the price was higher. But, what if I wait until tomorrow and the stock price goes down? Then I will have missed out on a better gain. Gah! Help!

You can drive yourself crazy spinning around on a merry-go-round of doubt and what if’s. The truth is, you’ll never know with absolute certainty when it is the right time to buy or sell. However, there are some tips and tricks you can use to maximize the chance that you’ll get the timing just right. Here's the most important one: dollar-cost averaging.

WTF is DCA?

Dollar-cost averaging (DCA, for short) is a way to protect against the unknown fluctuations in the stock market. Dollar-cost averaging is when investors take the total sum of money they want to invest in a company, and invest little chunks of that total sum into the company over time, instead of all at once.

For easy math, let’s say you have $12,000 that you want to invest in a company, let’s call it The Money Minute Company. Because you don’t know if today’s market price of The Money Minute Company shares is going to be the lowest price ever, or if you’ll get a better deal later on, you hold off on putting all $12,000 in on the same day. Instead, you put in $1,000 every month for a year. It's the most effective way to hedge your bets, and buy at that sweet, ever-elusive market low.

The average of where you buy-in every month will likely average out to split the difference between the high point and the low point. DCAing won't make you a gazillionaire overnight, but it will give you the best shot at success—and that’s all we can really ask for in anything we do on Wall Street. The zillions of variables will do their thing; you are never going to have total control. The most successful investors know that, which is why they opt into dollar-cost averaging.

xo,

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