Before you get too excited, this isn't financial advice, just an anecdote I have picked up
I was at a function for the Institute of Chartered Accountants tonight, and I was talking to a few other accountants, brokers and advisers. Everyone was sharing their post Global Financial Crisis war stories. I tell you, there were some shockers. Rule number one, don't mortgage your entire house to play the foreign exchange market (but you're not that silly are you!).
But in all seriousness, the one thing that did resonate with me, was the stories of people trying to pick the bottom of the market. For all those financial n00bs, picking the bottom refers to waiting until the market has hit the absolute lowest, then buying up big and riding the upswing. Conversely, picking the top is waiting till the market is at its absolute highest, then selling all your stock (or even going short) and lol-ling at all the suckers that are still in the market.
If you walk away with one thing from this blog, let it be this. You will never pick the top or bottom of the market. Sorry to burst your bubble, but the only time this will happen is purely random; and if that's your approach to building wealth, then you might as well take your life savings to the casino. Let me re-frame this for you; if I can't pick the top of the market and my friends earning six figures at Macquarie Bank, CommSec and Perpetual can't pick the top of the market, then I highly doubt you can.
Now that I have taken all the fun out of the stock market for you, I suppose I should leave you with something positive about the market.
Instead of picking the bottom, get into the market when:
I have surplus savings that I don't need for a very long time and that I would not miss if they lost half their value in a week.
To clarify, if I had $10,000 saved up and this represents 100% of my net worth, I would not be putting that money into the stock market. Or if I had $10,000 and this represented say 20% of my net wealth, but I wanted to buy a house next year and needed the money for a deposit, then I would not be putting my money into the stock market. Whereas if I $10,000 and this represented 10% of my net worth and I had not earmarked the money for anything else, then sure, why not put it into the market.
Instead of waiting for the top, get out of the market when:
I actually need the money for something productive, or when I have retired and I need the cash to live off of.
If I needed a house deposit or needed to buy a new car, then it might be time to cash in some stock. The important thing here is that I should never second guess my decision. If were to look back in ten years time and say, "I wish I never sold those shares," then I will spend the rest of my life, beating myself up about every financial decision I make. Shoulda, woulda, coulda; forget it. The second situation, is if I were heading toward or I was in retirement. The rationale here is that if the market dropped 50% and there goes half of my retirement saving, well yeah... I'm gonna be pissed. So I want to prevent this from happening by gradually moving into cash the closer I get to retirement.
Now we've covered some pretty heavy stuff today, so here's a disclaimer for you:
This article is intended to provide general information only and has been prepared without taking into account any particular person's objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. It is recommended investors obtain financial advice specific to their situation before making any financial investment or insurance decision.