Posts tagged: market timing

3 Common Investing Mistakes

Everybody makes mistakes. The difference between success and failure is how you deal with those mistakes. Nowhere is this more prevalent than in investing. Today I will highlight 3 of the most common mistakes I see investors make, and hopefully this will help you avoid the errors so many others have made.

1. Waiting to Get Even
It is common for investors to buy a stock that declines in value and then, regardless of underlying fundamentals, hold the stock until it at least gets back to the price they bought it for. Many people hate the idea of selling a stock at a loss, so they may hold on to a particular stock too long while other opportunities pass them by. Behavioral finance describes this as a cognitive error. By failing to sell certain stocks, investors can lose in two ways. First, they can hold onto the stock as it continues to decline in value and possibly ends up worthless. Second, there is an opportunity cost, where the stock could have been sold and proceeds reinvested in a stock with more upside that make up the value lost in a more timely matter.

No time was more evident of this than the dotcom bubble that burst in 2000 and led to a steep bear market. Many investors froze, not knowing what to do and did not sell until the value of their portfolio had been cut in half. Read more »

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Should you sell in August?

“After making several attempts to break through the psychologically important 1700 level, the S&P 500 ended the week down about 0.1%. This is the first week since mid-June that the S&P 500 declined.  While I do not feel that the market is set for a large decline and see any substantial pullback as a long-term buying opportunity, I am expecting some degree of selling in the short-term. The reason is very simple. Although I expect the economy to accelerate in the second half of the year, the second quarter is looking relatively weak. Additionally, top-line revenue growth for the companies within the S&P 500 is looking more and more elusive and earnings growth is lackluster.

Instead of being driven by earnings, the market is rising because P/E multiples are expanding. At the beginning of the year, the S&P 500 had a P/E multiple, based on expected 2013 earnings, of 13.8. As of the end of July, the forward P/E multiple of the S&P 500 is 15.7 times projected earnings estimates.  Effectively, P/E valuation multiples have expanded by 13.7% so far this year. As of July 26th, the S&P 500 is up 19.9%, or 18.8% if you exclude dividends. This means that the majority of the market’s gain can be attributed to stocks becoming more expensive, not underlying earnings growth. Read more »

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