By: Sean Hyman of StreetAuthority
Your whole life, you've heard "Timing is everything." You've probably also heard people say to "be in the right place at the right time."
When we do something has a whole lot to do with how successful we'll be at it. It's great to buy a home and hold it over time... unless you did it in late 2007. Tech stocks are great... unless you bought them in 2000.
I think you get my point. There's a right and wrong time to buy almost any asset out there.
The investing masses are known for buying in at the worst times and shying away during the best times to be a buyer. Why? They buy in the wrong phase of the market.
You see, there are many phases to a stock market advance and the decline that follows, but when you boil it all down, there are four broad phases. They are the stealth phase, the awareness phase, the mania phase and the blow-off phase.
I bet you can guess which one the public buys into. Yep, they buy during the mania phase. However, this is really the worst (and riskiest) time to be a buyer of stocks.
You see, they think that it's not all that risky because after all, stocks have been going up for a long time and "everyone is buying them." The news is upbeat and the rise of stocks is mentioned each night on the nightly news. So at first, it seems like the best time to buy. However, the reality is this is a horrible time to be a buyer of stocks.
By the way, what phase do you think we're in right now? Once again, we're somewhere in the mania phase. It was great to be a buyer of the Standard Poor's 500 Index and Dow Jones Industrial Average stocks last year and the year before and even this year... up until now.
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Now is when the real, high risks begin. Fundamental valuations are high for the broad stock market averages, and investor optimism is high because stocks have been hitting all-time highs recently.
I expected that. In fact, Fox Business Network had me as their top story the day the Dow hit 15,000 because I'd predicted it on their show when the Dow was at 13,800 and the news was very gloomy at the time. But from here on out, no one should be committing new money to broad-based index funds like the SP 500 or Dow, in my opinion.
Instead, they should be trimming some of these positions and raising their stop-loss orders up because at some point the blow-off phase is coming. And when it does, they will lose most all of their gains that have been made if they don't take precautions now.
But that's the defensive side of things. What can an investor proactively do on the offensive side?
While the stock market averages have hit all-time highs, not every stock has done this. No, some have already gone through their blow-off phase, which makes them safer buys than before.
In fact, there are some stocks that have been so far past their blow-off phase that they are now back into the stealth phase.
The stealth phase is called that because it's when the "smart money" begins to creep into the stocks that have completed their blow-off phases (which are where huge stock corrections and crashes happen). So the smart money has bought in after all of this has taken place, when the sentiment is horrible and no one wants to touch these stocks because they just got burned by them.
However, that's one of the best times to buy into stocks. This is what I do in the Ultimate Wealth Report. I buy stocks after their blow-off phase and on into their stealth phase.
The excesses have been wrung out of stocks at this point. Many times they are typically undervalued fundamentally and carry an above-average dividend yield too.
Then these stocks move into the awareness phase. This is when the early recovery is more evident and institutional investors begin to hop on board. (By the way, it's best to get in after the blow-off and during the stealth phase because you beat many of the hedge funds and pension funds to the stocks and when they come on board, they push your stock up a lot. They are the tidal waves of money that you want to be in front of... and not behind.)
You have to be patient in buying in the stealth and awareness phases because stocks aren't running at full force at this point, but your upside reward versus the downside risks are very favorable and you're reaping a dividend yield that most investors could only dream of.
After this finally comes the next mania phase. It's when the financial media gets a hold of the stocks and the momentum traders pile on board. You want to hang in for a bit during the mania phase, but you should recognize what's going on at the same time.
It's during this phase that the bulk of your gains are made. And by being smart enough to buy ahead of this, you'll be in at a great level and ready for the ride upward. You also have a much lower cost than most do who are in this phase.
Then, finally, when it seems like stocks can do no wrong and that stocks seem like they're never going to go down again (which is the state of maximum optimism), you want to begin to come out of those positions because you know the next blow-off phase is coming.
So the key is to look for the stocks that have already taken a beating by being the "dogs" that have gone through their blow-off phases.
Be careful. Blow-off phases can last awhile, and you'll have plenty of time to get in during the next stealth phase.
But get in the habit of thinking about what stocks and sectors are beaten down and very hated. That's the fishing pond you want to be in. It may sound counterintuitive, but this is how the best (and safest) gains are made, in my opinion.