“Time in the market” vs “Timing the market”?
Timing the market refers to trying to predict when the stock market will rise or fall, and making investment decisions based on those predictions. This can involve buying and selling stocks or other investments frequently in an attempt to buy low and sell high. Timing the market can be a difficult and uncertain strategy, as the stock market is influenced by many factors, including changes in the economy, interest rates, and geopolitical events, and can be subject to sudden and significant fluctuations.
On the other hand, time in the market refers to the strategy of investing in a diversified portfolio of stocks or other investments and holding onto those investments over a long period of time, regardless of short-term market fluctuations. This strategy is based on the belief that the stock market has a tendency to rise over the long-term and that the best way to achieve good returns is to stay invested and avoid trying to time the market.
In general, time in the market has been shown to be a more effective investment strategy for many individuals, as it can help to reduce the risk of loss and increase the chances of achieving long-term returns.
Better returns can be achieved by using a hybrid of both strategies: “buy low, hold for long.”
Instead of buying assets for your investment portfolio on a recurrent basis regardless of the price level, this strategy consists in determining the market dips and only buying on those specific moments to lower the average cost of the asset. A good indicator that can be used to determine the market dips is the Bollinger bands.
The Bollinger Bands is a statistical indicator used to help determine whether an asset’s price is high or low compared to its historical average. In the context of recurrent investment plans, Bollinger Bands can be used to achieve a better average cost for your investments. An easy and free way to access it is to go to www.tradingview.com/chart and add the Bollinger Bands under the indicators tab.
This indicator consists of three lines: a moving average, which is typically set to a 20-day period, and two other lines (the “bands”) that are plotted two standard deviations away from the moving average (one above and the other one below the moving average. Forming a channel). When the price of an asset is above the upper Bollinger Band, it is considered overbought, and when it is below the lower Bollinger Band, it is considered oversold.
One way to use Bollinger Bands in recurrent investment plans is by buying only when the asset’s price is below the lower Bollinger Band. This approach is known as “Reversion to Mean” and is based on the idea that prices tend to revert to the average over time. By buying low, you can achieve a better average cost for your investments.
However, this strategy involves a significant degree of risk and could result in missing out on potential gains if the market rises while the investor is waiting for a dip below the 20-day moving average.
Another way to use Bollinger Bands in recurrent investment plans is by using them as a tool for trend identification. When the asset’s price is trending upwards and is consistently above the 20-day moving average, it may indicate a strong uptrend, and you may choose to continue investing. Conversely, if the asset’s price is trending downward and consistently below the 20-day moving average, it may indicate a downtrend, and you may choose to reduce or stop your investments.
In conclusion, Bollinger Bands can be a useful tool for recurrent investment plans as they provide insight into an asset’s price relative to its historical average and can help make informed investment decisions. It’s important to note that Bollinger Bands should not be used in isolation and should be combined with fundamental analysis to make investment decisions. Additionally, past performance is not indicative of future results, and there are no guarantees in the stock market.
Investing in a diversified portfolio and using a long-term, buy-and-hold strategy may be a more appropriate approach for many investors, as it can help to reduce the risk of loss and increase the chances of achieving long-term returns.
Always consult with a financial advisor before making any investment decisions.
THIS IS NOT INVESTMENT ADVICE
This article expresses my own opinion. Nothing contained in this article should be construed as investment advice.
