San Diego is growing. There are thousands more cars on the road every day – and they are all in my lane!
I’m normally a cautious driver, but when the freeway lane I’m in slows to a crawl while those in adjacent lanes are flying by, I’m tempted to change lanes. But as soon as I do, invariably my new lane slows to a crawl while those in the formerly slow lane suddenly pick up speed and cruise by me.
The same thing happens in investing.
Day traders jump from stock to stock, just as road jockeys hurtle from lane to lane. And just as road jockeys make great time when traffic is flowing, in rapidly accelerating markets, day traders think they’re making savvy moves. But when conditions change and stocks fall, they may find they aren’t so smart after all as they give back all the profits they’ve made.
So how do you get ahead in the financial markets? The same way you do on the road, by knowing what the conditions are ahead, and acting on that information.
If your goal is to get downtown as quickly as possible, you’ll wait until the lanes clear after rush hour to drive the freeway. And if you want to make profits as quickly as possible, you’ll invest when the economic situations for the foreseeable future looks bright.
When traffic is bad, you’ll be better off taking the train. And when economic conditions turn sour, with more of the same on the horizon, bonds or cash or real estate might be better investment vehicles than stocks.
On the road, you can’t predict accidents, but at least you know when rush hours begins and ends. It’s tougher to predict economic conditions, which are more erratic and subject to unforseen change.
For most investors, buying and holding a prudent mix of quality investments makes more sense than rushing in and out of investments, trying to time the market. Market timers, just like road jockeys, have to be right 70% or more of the time to do better than those who act prudently and stay in the same lane.