Editor’s note: This article contains information only. It is not intended as general or personal advice. Your Money recommends seeking professional advice specific to your personal circumstances.
When it comes to investing in stocks, timing is everything. But how do you know when the time is right?
With market dynamics frequently shifting, it’s not always easy for new investors to decide whether it’s the opportune time to buy or sell stocks.
Investing v trading
According to Andrew Campion, head of investment products at the ASX, would-be investors should first be aware that there’s a big difference between investing and trading.
Investing is working towards longer-term objectives of at least three to five years, according to Campion, and anything shorter than that is trading.
“There’s a very different rule book. From experience, I can tell you that it’s actually much much, harder trading than it is investing,” says Campion.
“The very first thing is that everybody should have is an investment strategy tailored to their own individual needs and their own risk appetite.”
He says investors with lower risk appetites should look to long-term, lower-cost investment products such as index funds and ETFs and will need to buy less often.
On the flip side, traders buy and sell shares frequently, depending on market conditions.
“Focus on your long-term objectives, tailor your portfolio to suit your individual needs and your individual risk appetite.”
Once you’ve worked that out, you can start making calls on when to buy stocks based on a few simple rules.
1. Buy low, sell high
Not every falling stock is a good buy, but Warren Buffet’s famous ‘buy low, sell high’ mentality is a good rule of thumb in general, according to Campion.
“Stocks or securities are on sale during a pullback. When things are on sale at the supermarket you tend to stock up. View investing in the same way,” says Campion.
Chris Macdonald, investment adviser at Morgans Financial said investors should especially look out for opportunities when stocks fall while economic indicators remain strong.
“When sentiment goes to a massive negative, as we saw in December last year, but global growth was actually tracking along with no breakout of inflation. There’s a disconnect there and an opportunity to add to blue-chip portfolios,” says Macdonald.
He advises investors to look out for falling stocks that consistently surprise the market by jumping in value, such as A2 Milk.
2. Don’t wait too long
At the end of the day, time is your biggest asset in the investing world, according to Campion.
He says investors should start sooner rather than later, even if it’s just putting small amounts into an investment.
“It’s a mathematical truism that if you start early, you leave the money there and you reinvest your dividends it ends up in great long-term results,” he says.
“There’s never the perfect time, there’s never a bad time. Just start now and let the miracle of compound interest work in your favour.”
3. Buy at regular intervals
Campion says the trick for reaching long-term investment wealth is to have regular amounts going into your portfolio, whether that’s weekly or monthly.
“View it as just a simple discipline that investors should have, just regularly contribute to your portfolio. Don’t pay much attention to short-term volatility or movements or news,” he advises.
4. Watch the brokers closely
Finance brokerages frequently give price targets on big companies, which can be an indicator on whether the stock is being viewed favorably by the experts.
The price represents the best possible outcome for that broker’s clients’ investment and the price at which the broker thinks their client should exit their position in the company.
“If you see all the brokers move their share price targets significantly… that’s quite a good indication,” said Macdonald.
5. Regularly review
Any investment expert will tell you that the key to protecting your portfolio is to make sure you’re diversified across sectors, countries and assets.
Macdonald says it’s important to regularly review your portfolio to work out whether it’s still meeting your long-term or short-term objectives.
“Sit down with your adviser or sit down with your spouse and talk about it. Because things are changing a lot faster in the world as you know,” says Macdonald.
“Ask yourself, what is going to be the size of the market that you’re investing in five or ten years time. You want to be investing in growing markets not shrinking markets,” says Macdonald.
Around 54 per cent of Australian investors don’t hold diversified portfolios, meaning they’re at greater risk of stockmarket fluctuations.
If you hold too many stocks in the same area or you find one sector is underperforming, the in might be time to sell and buy new stocks.
For more investment tips, watch the discussion above.