Thank you all for your insightful responses. Looks like all the advice I got
from friends and Fidelity was good. Much appreciated.
Roger.

Roger wrote:
- quote -

Because it's very difficult to repeatedly be correct about what "high"
and "low" are. The market rises over the long term, and at some point
the train will leave the station without you (actually, it happens
frequently and unpredictably). When would you get back in?

Google this for one study on the subject:
TOWNELEY MARKET TIMING STUDY

-Tad

Roger <rajivshah[at]sbcglobal.net> wrote:

- quote -

There's nothing wrong with buying low and selling high, if you can
predict when the market will be low and high. Generally, the market is
relatively efficient, which means that short term variation is
essentially a random walk. To the extent that the market as a whole is
a random positive expectation proposition (meaning that the average
expectation is that stocks will return more than alternative investments
in the long run), staying out of the market for any particular period of
time is going to earn you less than being in.

Just because one time you bought stocks right at the bottom and sold
just before a downturn doesn't mean you are going to be able to predict
the highs and lows consistently enough to beat a buy and hold strategy
in the long term. If you can, more power to you, but a lot of research
suggests that with a few exceptions, this is not possible on the
timescales in which a typical individual investor operates.

I believe that markets can become irrational and make prices too far out
of line to be worth investing. But only in the most extreme cases does
it make sense to get out. A lot of people thought that the markets were
irrational in 97/98. And they may have been right, but getting out
*then* lost to staying in and getting both the incredible run-up *and*
the huge hit in 2000-2001, unless you way overbet the worst hit sectors.

Basically, until prices hit the "certfiably insane" stage (either high
or low, and which happens only a few times in a typical investors
lifetime), the chance that they go further out of whack is just as high
as that they will come back to reality.

- quote -

Stocks are priced to earn what the market feels is necessary to justify
the risks at *all* times. Because information and market psychology
change rapidly and unpredictably, this general upward trend is halted by
a lot of (to you) random variation.

Think of the stock market as if it were a positive expectation gamble.
Suppose you have a chance to bet $50 on the roll of a die with the
following payoff table:

1 : 0 (lose 50)
2 : $25 (lose 25
3 : $50 (even)
4 : $60 (+10)
5 : $75 (+25)
6 : $100 (+50)

Now this looks like a really good bet, one you'd never see in a casino.
On average, you expect to win $1.6667 for every roll. As long as you
can stand to lose a few repetitions of $50, you'd take this bet every
time, and keep taking it, no?

Now what if you rolled a 6 7 times in a row? Now you're up $350! Do
you "sell high" and stop betting? Or do you keep going because you're
on a roll? Well keeping going is right, but not because you're on a
roll, but because every bet earns you money on average.

The stock market is a bit like this. In any give time frame, there is a
lot of plain luck. But every day that you have your money in the
market, the *average* payoff is almost always positive, and almost
always better than other investments that don't carry significantly
greater risk (like owning individual businesses or property).

As market psychology changes, the payoff table changes. On occasion,
you might judge that the payoff table is just not good enough to justify
the risk, but small movements don't do that. Huge, bubble-movements are
what it takes to go there.

So the question is what risk can you tolerate. If you have $50 in your
pocket and nothing in the bank and you aren't getting paid for two days,
you probably don't want to roll that die since a 1 means you don't eat.
OTOH, if you have many thousands of dollars handy, nothing better to do,
and no more profitable bet to make, you'd roll it as much as you could.
what happens in the first few trials doesn't affect whether it makes
sense to keep rolling.

Similarly with the stock market: if you've got money that you need in
the short term (to pay for your food), you have no business investing
*any* of it in stocks. OTOH, if you have a bunch of money that can
withstand some short term losses, it's going to earn more in stocks than
most other places.

- quote -

Asset allocation along the so-called "efficient frontier" can lower your
volatility significantly without lowering your return by much.
Basically putting your whole nest egg in 100% IDX500 may not on average
outperform a portfolio with some international, and a small amount of
fixed income, but will have much greater volatility. Imperfect
correlations between asset classes cancel out some of the variance while
leaving in the return. Periodic rebalancing manages to accomplish some
of your desire to buy low and sell high without having to predict the
whims of the market. Just following some percentage allocation will
cause you to put more money into asset classes that have recently
underperformed and less into those which have overperformed.


Michael

"Roger" <rajivshah[at]sbcglobal.net> wrote:

- quote -

If you can do this consistently, you are wasting your time posting to this
newsgroup. You should be trading your way to fame and fortune. The fact of the
matter is that you can't.

- quote -

What you are missing here is that the sell decision is based on how much you
expect to make in the future, not how much you already have made. The question
to be asked is "Is this investment the best place for my money today?" The
easiest way to screw up the sell decision is to focus on how much money you have
made or lost. Forget what you paid for the investment.

-- Doug

Roger wrote:

- quote -

"Buying low and selling high" is one dimensional - albeit naive.

- quote -

You have no concept of risk and your friends are amateurs.

- quote -

Allocate to reduce risk exposure.

- quote -

Past performance is not indicative of future results.

In article <URdLd.9309$8Z1.533[at]newssvr14.news.prodigy.com> ,
"Roger" <rajivshah[at]sbcglobal.net> wrote:

- quote -

You say that timing worked for you, but you have only one data point
to use for your theory. If it worked one time for you, and failed
1000 times for other people, do you still think it always works? In
order to turn an observation into a rule, you have to repeat the
test many times over at different times in different market conditions.
People have done that analysis, and found that it is not a winning
strategy.

The problem with waiting for the market to go down is that it might
not go down, and then it might go even higher. You miss out on
getting in, so you don't take advantage of the upward move.

- quote -

What will you do with the money when you sell? Chances are that if
your investment went up 10%, most everything else went up about 10%.
So when you cash out, you have no place to put the money except back
into other investments that have had a similar gain. You certainly
do not want to put your money into stuff that did not make the gain
since they are dogs. The stock that is most likely to go up is one
that has already had some gains, so stick with your winner, and
ditch the losers.

- quote -

This up and down movement of the market is called volatility. People
who have studies this from an academic point of view have found
that keeping a part of your portfolio in fixed income stuff like
bonds can significantly reduce your volatility without dramatically
reducing your rate of return. Rebalancing after a stock run-up is
one method of maintaining this edge. If forces you to sell losers,
take some profits from winners, and keep your portfolio less volitile.

-john-

--
================================================== ====================
John A. Weeks III 952-432-2708 john[at]johnweeks.com
Newave Communications http://www.johnweeks.com
================================================== ====================

Hi from a novice investor,
I recently opened a Roth-IRA with Fidelity and put $7000 (maxed
out-2004+2005) in it. I also have a regular individual investment account
with Fidelity where I have only one position - Contrafund. I am in the
process of figuring out which fund to put my 7K (in Roth) into. I have
talked to friends and Fidelity + read snippets from articles online. I do
not understand the following advice and I need your opinion on it:

1. DO NOT TIME THE MARKET: If you do, you will end up a loser. 98% of
investors who time the market end up losers (Fidelity). Well, I timed the
market with Contrafund (opened account in Jan 2004, put $10K in core account
and waited till August - then invested in Contrafund), I bought low and IT
WORKED. It takes hardly a minute to check the S&P once every day, so why
shouldn't I wait till the index drops and then buy? What is so wrong about
"buying low and selling high"?

2. PICK A GOOD FUND, BUY IT AND THEN FORGET IT: It will grow for you if you
stay in it for the long haul, say my friends, some of whom are experienced
investors. Although I understand this one somewhat, my gut still says - sell
high. If I stand to make more than 10% return, why should I stick with it?
What am I missing here?

3. BALANCE YOUR PORTFOLIO, ALLOCATE YOUR ASSETS: This one from Fidelity.
Complicated stuff but important sounding. Well, why should I? The market
returns 10% a year average and I am into investing for the long haul. Why
don't I just pick a few good funds and forget about asset allocation? A few
dips in the market not withstanding, if I am in it for the long haul, I'll
still end up making 10% average, right?

I have always enjoyed the quality of discussions and advice in this
newsgroup and I hope I too will receive opinions that will help me balance
my gut feeling with the expert advice above.
Thanks,
Roger