Here's an easy way to lose money quickly in the stock market

New york stock exchange ticker tape garbage crash AP ImagesNew York Stock Exchange, October 1929

People that follow the markets remember the morning of August 24 well.

The Dow fell over 1,000 points at the open, a number of stocks were halted altogether after falling more than their allowed limit, and chaos was more or less breaking out across the universe of global financial assets.

When all was said and done, the Dow lost 588 points, the S&P 500 has collapsed into a correction, and the mood in markets seemed to have turned on a dime.

But if you didn’t sell in that first hour of trading, you escaped the worst of it.

If you did, well, that’s not good.

From The Wall Street Journal:

On the evening of Sunday, Aug. 23, a client called Steven Podnos, chief executive of investment adviser Wealth Care LLC, and told him to sell all her stocks. Mr. Podnos, whose firm oversees $US250 million for about 120 families in Merritt Island, Fla., persuaded her to hang on to the bulk of her investments, but agreed to sell a handful of exchange-traded funds, or ETFs, investments that act like a mutual fund but trade on exchanges like a stock.

He placed the orders early Monday, Aug. 24, worried in part that a deeper sell-off was in the making. One ETF, the iShares Core S&P Small Cap ETF, fell as much as 30% before rebounding. He estimates that the plunge and snap back in the ETFs cost the client several thousand dollars.

“I was sitting there looking at it and said, ‘Oh my god, this is crazy,’ but I didn’t know it wasn’t going to be worse,” Mr. Podnos said.

See, investing is hard.

This anecdote comes from a piece about how trading early in the day is the worst time to trade because bid-ask spreads are unfavorable. Bid-ask spreads, which are a function of how easily market makers can match buyers and sellers, are widest right at the market open, meaning it’s hardest at this time to match buyers and sellers are close prices.

And while this report is mostly a look at the nuts and bolts of how markets work — or don’t — the takeaway here is that market timing is hard and perilous and will cost you money.

People often think about timing the market in terms of big indexes making big, long-term tops or bottoms. Like, for example, after a 200% increase in 5 years, is the S&P 500 currently at the top? We won’t know until after the fact.

But as this anecdote illustrates, market timing is also something that can become a fools game inside any one trading day.

Mr. Podnos had agreed to sell an exchange-traded fund for a client and, under these orders, appears to have sold at more or less the absolute bottom. The reason, as he explains to the Journal, is that he “didn’t know it wasn’t going to be worse.” In essence, he knew he had to trade these funds at some point during the day and in an effort to stem what seemed like never-ending losses, maximized those losses.

Of course, this is a tough spot for any financial advisor as you’re weighing what makes sense for your client against what you’ve promised them to do against your own fears about the market and so on. Again, investing is hard.

But as we’ve written time and again, timing the market — or, said another way, allowing yourself to actually make a decision exactly when to buy or sell — will lose you money. Put some money in the stock market consistently over a number of years, regardless of what’s happening, you will see gains over the long term. Even if you think the market is crashing or even if it does.

Read the full story at here »

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