A Financial Series: Timing Stock ETFs and a Quick Lesson from Benjamin Graham
The main aspect which determines the quality of purchase price in every investment decision you make is the proper understanding of time in comparison with the securities’ current value. Time should be used to give you a reference of where market highs and lows occur. What sense does it make to be encouraged or fueled by positive crowd sentiment to make a poor decision, because the purchasing price was high considering the securities’ past market values? This sort of logic gives very small room for returns and opens a grand entrance for losing all invested capital. For instance, let us look at today’s stock market. We have all seen the Dow reach 20,000 over the past few weeks, and if you are considering buying into main market exchange traded funds, this is the worst time to invest into the booming stock market. Applying some investment methodology from legendary value investor and portfolio management theorist Benjamin Graham; we should object any purchasing price which does not take on a “historically low” level. What ends up happening with buying into booms is a lack of a margin of safety, and this basically strangles any chance of returns. So to establish where a correct purchasing point occurs for a main market Exchange Traded Fund or ETF, like one that follows the Standard & Poor’s top 500 or the Dow Jones Industrial Average, I would look at graphs that clearly show where the “historically low” points occur. It can be that simple, but it may take time until that purchasing price comes back into existence, but more than likely it will go near it. Buying into economic downs will simply maximize your returns. This will allow you to not only lower the risk of losing money, but it also opens the door to a higher return when the market eventually stabilizes. The stock market offers you no promises, but fair judgement and patience should reap some substantial rewards.