The #1 indicator to know when to buy or sell

There is no lack of ideas on what to evaluate when deciding whether to buy or sell a stock or mutual fund, whether to invest or “sit on the sidelines”, etc. However, one indicator trumps them all!

 

If you want to feel overwhelmed, Google “financial indicators”. Actually, I did it for you and got back 106 MILLION results. In financial publications, textbooks, and many (boring) cocktail parties, you will hear the importance of taking action based on <insert statistic here>. Some of the more popular ones you might have heard of:

  • Economic indicators – gross domestic product (GDP), the Consumer Price Index (CPI), the national unemployment rate, and many more;
  • Market indicators – how much volatility a particular index exhibits, recent market performance (a bull or bear market), etc.; and
  • Other – consumer sentiment, and some downright funny ones (hot waitress economic index or leading lipstick indicator anyone?)

Some prognosticators urge people that because indicator X is at Y, you should take Z action NOW.

I would argue that the most important indicator is something you likely have access to right now – the simple calendar. “Wait”, you say, “how is the calendar a better indicator of when to take action?”

  • It ignores conflicting theories. Indicators sound impressive, and people can point to times where past markets prove their theory. However, there are many thousands of influences to the market. If a simple number or set of numbers foretold the market, don’t you think that people would get wildly rich using them?
  • It does not rely on emotional reactions. Fear and greed are the lifeblood of the financial media…without creating it, much of their audience would stop paying attention. Introducing emotions into the decision process is rarely a smart idea.
  • It imposes discipline. Having a plan of how often you will rebalance, how often you will evaluate the investments you hold, and how often to change the allocation you use and sticking to that plan makes the process less stressful and more likely to be successful.

Certainly, other factors may dictate a change such as a short term need for cash or a change in marital status. But do not be surprised if I do not have an opinion on a certain financial indicator. It is likely that my systematic approach pays no attention to it.