I’m often asked questions like: “Should I be timing the stock market? Should I buy on the lows and sell on the highs? Are there key market timing signals that I can study to be a successful investor?”
Obviously, there’s no direct, clear or concise answer, but with an investment philosophy such as ours, we believe that you’re likely better off to stay invested and not worry about any market trend signal.
Now, how are you supposed to time the stock market with some new money that is coming your way?
That being said, should you experience an inheritance or windfall, sell a piece of property or win the lottery, there are several strategies to consider when investing those funds. With these considerations it is important to remain defensive, protect capital and reduce market timing risk as much as possible.
Now, how can you do that?
One of the strategies we’ve used in these situations is legging in, which is when you buy over a pre-fixed period of time.
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Generally, if you’re a high networth individual and you have a significant amount of cash, you’ll want to leg in your cash in the market over a longer time horizon.
If you were lined up to receive a $10 billion inheritance, then you would most likely want to take a lot of time to leg that in.
However, if you inherit a few hundred thousand dollars, then you might invest over a shorter period of time.
A couple is about to receive a $2 million inheritance and they’ve got maybe 300-400K in RRSPs.
This inheritance would represent a solid 5x more assets than they currently have. Our goal is to protect the capital and limit any market timing risk. Utilizing a legging in strategy will allow us to allocate their $2 million inheritance over a period of 6 months to 2 years.
This will help mitigate risk and avoid putting their cash/assets in the market in a very short time window. Avoiding downside risk in the event of a correction or in a draw down is key to protecting your capital without missing the possibility of an upside in the market.
Why does this matter?
Let’s say the market drops 5% or 10%.
This represents a buying opportunity and we would be legging in.
If the market drops 5%, we leg in a portion of the assets and if the market drops 10%, then we leg in a further piece.
If there’s a period with a crash or a bear market and the market drops 20%, 25% or 30%, you would’ve been buying all the way down so it’s not necessarily market timing.
Our legging in strategy helps to mitigate any market timing risk.
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If you’re simply investing your annual RRSP proceeds or your TFSA proceeds and you want to put that money to work, we would suggest not worrying about stock market timing as it’s impossible to predict if the market is going to be up a year from today or tomorrow.
Trend trading is a strategy that attempts to time a security’s momentum in a particular direction by identifying market trends.
Here are some common indicators used to determine a market’s trend pattern:
- Moving Averages
- RSI (Relative Strength Index)
- MACD (Moving Average Convergence Divergence)
- On-Balance Volume (OBV)
Traders will analyze technical indicators, look at multiples to see whether stocks are trading at a historically higher price than they normally would be and they focus on market cycles for insight on market trend signals. There are a lot of moving parts here and it’s a not a strategy for everyone.
I’m sure your parents probably told you to do this, but in case you don’t know, it’s possible to reduce market timing risk by buying once a month for 12 months.
It’s a common strategy that I feel many people have heard of and know about, and yet we often don’t see it being leveraged.
An example of how this may work: If you know you’re going to be making 50K in annual contributions and annual savings, then you could try to spread that out.
Once again, take a look at legging in a portion of the 50k. If there is no dramatic market correction, you will be fully invested at the end of the 12 months and have benefited from buying on some dips in the market.
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