When you participate in the stock market, timing your purchases and sales is important. You want to buy low, hold and sell high. Or you want to sell high and buy low or you want to buy a dividend paying share at a low price.

In order to buy or sell at the price you want, some form of market timing is inevitable. But how do we do time the market? You Cannot Time the Market (All the Time)

One of the key lessons I’ve learnt from investing (and the occasional gambling) on the stock market is that you cannot time the market all the time. As a retail investor, one is limited in being able to call the troughs of the bear market and the peaks of a bull market. Hence you cannot hit the highest of the high or lowest of the low because these change and evolve so long as the market is still running and the market can go on long after we have moved on from this world.

You still need to observe the market and try a limited form of timing, i.e. buying blue chips when the market has corrected sharply (e.g. Dow plunging 300+ points) if you have a long-term and more positive view about the business prospects of the underlying fundamentals of the company. This doesn’t guarantee that you will buy low but at least you’re not buying at an over-valued price.

The value versus price of a share requires judgement and our interpretation of the facts, information and market news surrounding the company. Thus, my own rule of thumb is to consider nibbling a few lots of the dividend paying blue-chips that I am eyeing during such periods of overall market correction. I also buy within my means and never commit more than 75% of my portfolio into equities (I’m currently at 17% equities and 83% cash).

Timing Your Cash Flows

One of the timing mistakes I made during my own experience investing in the stock market is to time my cash flows wrongly. Most personal investment books will teach you to only invest with money you can afford to lose. They do this because you are more willing to take a longer term view and ride out market volatility in your share purchase if you can afford to hold on to the shares. If you are pressured to sell the share to meet your mortgage payment, living expenses or unforeseen emergency, then you may need to sell when the market conditions is poor. For instance, during sub-prime my portfolio value was down 70% at one stage. If I had sold then at the bottom of the market if I needed to raise cash, then I would have suffered massive realised losses.

I count myself fortunate that I am now heavily weighted in cash due to the timing of the sales of my previous home. It has nothing to do with my foresight and it’s plain luck that I’m well positioned now that the market is correcting. I may nibble and buy some blue chips for my defensive portfolio but will plough most of the CPF returned from my sales of my previous home as well as a big chunk of the cash proceeds into clearing the loan.

Being aware of your cash flows is critical in determining how much of your net investible capital can be used for investing in shares. If you under-estimate your cash flows, you could put yourself in a position where you need to sell your shares at unfavourable market conditions. If you estimate accurately your cash flows, it allows you to better manage your investment capital for better returns than the 0.1% to 0.2% given to you by banks for savings deposits.

The Ultimate Timing – Funding Future Cash Flows

I’ve come to realise that even if we cannot time the market well all the time, we still need to practice some form of market timing because our future cash flow needs will change. My purchase of my new home required me to put a lot of my investible savings into cash by selling a big portion of my shares. I was fortunate that I sold before the Euro problems hit investor confidence in markets so managed to obtain decent prices (and small capital gains) on my sales. I had sufficient cash to fund the cash portion of the purchase over and above the minimums. The sales of my previous home effectively allowed me to “cash out” some of my home equity since my new home is funded by bank loan although my sales proceeds and additional cash was more than sufficient to cover the purchase price.

Thus, I’m still in a positive net worth position except that my personal balance sheet has a large liability due to the bank loan but is more than matched by the liquid assets (cash and shares) as well as CPF ordinary account balance (which will be ploughed back to the new home).

My recent home transactions made me realise how important my tracking of personal net worth and cash flows was. It allowed me to precisely know how much I needed to sell by when and also how much cash I needed to raise. It also gave me the confidence to go ahead to purchase my new home knowing what available resources I had on hand.

What cash flow timing and market timing situations have you encountered and how did it turn out for you?

Share with Panzer in the comments section.

Be well and prosper.

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