The following is a guest post from one of our friends, discussing a topic that we haven’t written about too frequently on our website. Sure, we screen stocks to identify undervalued dividend growth stocks. But we haven’t covered identifying the best time to trade for both short-term and long-term investors. Please see the following post to learn more!
The best time to invest in the market depends on many factors, such as your investment goals and time horizon. Naturally, investors and traders who have a shorter-term horizon can accumulate substantial losses if they invest their funds in bear markets and traditionally underperforming months.
On the other side, longer-term investors don’t have to worry about the best time to invest, as in the long-term, the time could be right now.
In this article, we’ll take a closer look at the best times to invest in the market both for short-term traders and long-term investors, and show you a few tricks that can help you decide what’s the best time to sell your investments.
Watch: Investing vs. Trading: What’s the Difference?
Investing in the Short-Term: Best Time to Buy
Let’s face it – short-term investing is exciting which is why many traders are day-trading the market.
Phillip Konchar, Head Tutor at the Forex training provider My Trading Skills says, “With the right approach, day-trading can make a significant difference to your bottom line. To gain that right approach requires studying and then applying what you’ve learnt in the actual markets.”
Here are some tips on how to time your market entries in the very short run.
Best Time of Day to Buy
The most rewarding time of day for day-traders is in the morning. The market’s opening bell offers some of the largest price-movements and volatility as market participants scrutinize all news released since the last closing bell. Many day-traders focus primarily on the period between 9:30 – 11:30 ET to place their trades and take the rest of the day off.
However, if you’re just starting out with trading, bear in mind that the large market volatility can work both for and against you.
Watch: What makes a successful trader?
Best Day of the Week to Buy
Some traders believe that certain days of the week, such as Mondays, offer better opportunities than others. The well-known Monday Effect refers to the tendency of the market to drop on the first day of the week on average. Some researches link this phenomenon to news released over the weekend which can have a negative impact on market perception.
However, as many traders have begun to take advantage of the Monday Effect by buying when prices are low, the effect has largely disappeared. Still, markets tend to drop on Monday and rise on Friday, as the following S&P 500 chart for 2018 shows.
Best Month of Year to Buy
Certain months of the year tend to outperform others on average. Summer months are historically positive for the stock market, just like months around the turn of the year. September, on the other hand, underperforms on average.
Besides the Monday Effect, there is also the well-known January Effect which causes stock prices, especially small caps and value stocks, to rise during the first month of the year. The historical performance of the S&P 500 on a monthly basis is shown on the next graph.
Long-Term Investing: Stay Invested in the Market
While many traders are attracted to the thrills of short-term trading, evidence shows that investors who stay invested in the market tend to make larger returns than traders who actively manage their portfolio.
Identifying market turning points, which is important for short-term traders to time their entries and exits, is quite difficult. However, since the stock market has had an average annual return of around 12% since the 1920s, long-term investors don’t worry about their market timing. They just let their portfolio ride the peaks and troughs of the market – and add new positions when stocks are at a discount during bear markets.
Long-Term Investing: When to Sell Your Investments?
Even though staying invested in the market returns positive results in the long run, there are certain situations when investors can decide to close their positions. The following tips work both for long-term investors and short-term traders.
When stocks become overvalued, consider selling them. Compare the Price/Earnings ratio to other companies in the same industry – if a similar stock has a P/E ratio of 10, and your stock has a P/E ratio of 40, it’s probably overvalued.
Economic recessions are another opportunity to get rid of your investments. This applies more to short-term investors than to long-term ones, as bear markets are also considered a great time to increase your stock exposure over the long run when the prices are bottoming. Still, since short-term investors have a shorter holding period, many of them can’t afford to stay long when prices are declining.
Technical Trend Reversal
How to identify an upcoming bear market? One of the best tools is a technical trend reversal. If the broader stock market, represented by indices such as the S&P 500 or DJIA, fails to make a fresh peak and declines below the recent trough, we’ve got a technical trend reversal.
Failure swings and non-failure swings, as described in John J. Murphy’s book “Technical Analysis of the Financial Markets”, are easy-to-follow technical patterns that can help you identify a potential trend reversal.
The best time to invest in the market depends on a number of factors: What is your trading horizon? Are you a beginner or seasonal trader? Do you want to trade with a set-and-forget approach or actively manage your trades?
For short-term investors and day-traders, buying on Monday and selling on Friday tends to produce slightly better results than doing so on other days of the week, on average. Summer months and the turn of the year are also known as months when stock prices rise, while Septembers are usually underperforming.
Longer-term investors will get the most out of their investments when staying invested in the market for a considerable amount of time to benefit from the compounding effects of capital gain and dividend reinvestments.