Scotia Investments

Financial Learning Centre

Scotia Investments Financial Learning Centre

Money Management Guide - The Best Time To Invest In Stocks?

Is there ever a good time to invest in the stock market? This question is frequently asked by investors, and for good reason, as no one wants to invest in a security only to see it fall the following day or even the following week. There are two contending views regarding the best time to enter the stock market.

The first view is that the best time to invest is when the economy is growing and companies are performing profitability. In the Jamaican scenario, persons who hold this view often use movements in interest rates as a guide to 'time' the market. By 'timing' the market, these investors tend to 'hop' in and out of it depending on the direction of interest rate movements.

The opposing view is that any time is a good time to invest in the stock market, as the stock market generally provides the best returns on investment over the long run.

So which one of these is correct, you may ask? Research carried out both locally and internationally, support the view that all things being equal, people that stay in the stock market during its ups and downs tend to fare better than those who hop in and out of the market. This is possible as there are two (2) well known techniques that these types of investors can use to protect their portfolios against any loses that may occur in the stock market. These techniques are Portfolio Diversification and Dollar Cost Averaging.

Portfolio Diversification

Portfolio diversification simply means not keeping all your eggs in one basket. In this technique, investors spread their money over a range of investment products including stocks, bonds and even cash. This type of diversification into less risky instruments can protect investment portfolios against normal declines in stock prices. The percentage placed in each security will vary depending on your individual preference and the advice of your Investment Advisor.

Dollar Cost Averaging

This is another technique that can be used by the investor that is willing to stay in the market even when prices fall off a bit. Dollar cost averaging means investing the same amount of money in a security at regular intervals.

Here's how it works. Assume for argument's sake that you want to invest $1,000 per month in stocks. If the stock price increases you will get less stock for your money or if the stock price declines you will get more stocks for your money.

This method allows you to win on the average price you pay for the stock. For example, say over a 6-month period you had paid the following amounts for each stock: $15, $13, $18, $10, $13, and $16. The benefit is that over the period you would have paid an average price of $14.16 per stock unit, even though the stock went as high $18.

In the final analysis, no one can predict the market or indeed the movement of a stock price with perfect accuracy. What is certain is that at some point in the future, the stock market will rise or fall. With a diversified portfolio or dollar cost averaging strategy, however, you can stay ahead of the investing game without having to time your entry for maximum advantage. In the long run the investors that use these strategies will be ahead of the market whether it is up or down, once they invest in a company that has solid performance. Consistency and patience is key. Happy investing.