Products vs. process

When it comes to investing, most people tend to think about what to buy, not when to buy. Even the media tends to focus on the “The top 10 picks” rather than merits of well-planned timing. In part, the focus falls to product rather than process because it’s easier to understand and sexier. Who wouldn’t rather hear how a tip-off from the friend of a friend paid off big time as opposed to a bunch of boring statistics related to investment timing?

In fact, a study by the University of Chicago published in Investor’s Business Daily suggests that while sector and market risk control about 80 percent of price action, most investors spend 80 percent of their resources analyzing company risks.

Obviously, it makes sense to focus your attention on what controls 80 percent of price movement but what exactly is “it” and how do you track it?

In a nutshell, “it” refers to the health and direction of the broader market, and to track “it,” you need a basic understanding of the supply and demand of the market. Thanks to technology, this is not nearly as difficult as it sounds. Most financial websites actually do the heavy lifting for you by graphing the S&P 500 or Dow Jones Industrial Average. But it’s up to you to look at the past 50-, 100-, and 200-day moving averages. If the current level of the index is rising above these averages, it’s a good indicator that demand is in control and that it’s a good time to commit new money to the market.

Conversely, if the current level is falling and is at or below the 50-, 100- and 200-day levels, it’s an indication that supply is in control and any new investments should be made with extreme caution, if at all.

Market volume is another indicator that will give you a good sense of whether supply or demand controls the market. If the number of shares being traded is on the rise, along with prices, so is demand, and again, it’s a favorable time to invest. But proceed with caution: higher volume but lower prices means supply is outpacing demand, not necessarily the best time to make a new investment.

Obviously financial advisors have access to data, tools, and software far more sophisticated than what’s outlined here but the basics remain the same: market supply, demand, and volume will generally steer you toward making a well-timed investment. While it may not be as exciting to talk about up front as some super-quick tip buy, the gains will give you far more to talk about down the road.