If you like the idea of being out of the market during bad times, which is the basic tenet of timing, but you don’t have the time or perhaps the fortitude to manage your trades yourself, you might decide to use an advisor or a broker.
But unless you have a sizeable account — usu- ally larger than several million dollars — few true timers will even consider taking your money under management.
If you find someone who will take a modest account, you probably won’t get the kind of service that you think you deserve, as your account will likely be lumped in with all the other accounts that the broker or timer uses for timing.
Depending on your agreement, your broker may have to call you and ask your permission to trade on your behalf. If instead you give your broker discretion to make trades on your behalf, you may not like the risks she takes with your money. You may face some conflict down the line if your broker is unscrupulous or not very talented.
In my experience, finding a broker, investment advisor, or financial planner who is willing to time the markets and can actually do it suc- cessfully is very difficult. Another option is to put your money in a mutual fund that times the markets. There are very few of those, and even
fewer that do it well. Here are two that have had good records:
✓ CGM Capital Appreciation is very aggres- sive. It doesn’t say that it times the markets in its prospectus, but it actually admits to
“frequent trading” and higher “transaction costs” due to the increased trading volume.
That’s code for market timing.
✓ PMFM offers two different timing strate- gies, the Managed Strategy and the Core Managed Strategy. The Managed Strategy is pure market timing and is based on a technical asset allocation model of the stock market. This approach to the markets can lead to market exposure of 0 percent up to 100 percent, depending on the model’s reading, and the market’s interpretation of the model. The Core Strategy always has a minimum exposure of 50 percent to the stock market but can have up to a 100 per- cent exposure. PMFM manages individual accounts and offers mutual funds.
My point here is not to recommend CGM or PMFM, although if you’re looking to time the markets passively, these institutions aren’t a bad way to go. My point is that you can time the markets, and that there are professionals out there that can do a credible job for you.
Financing Your Timing
You need money to make money, and certainly you need a source of money to get started in trading, as well as to buy or upgrade equipment, and to obtain reliable trading and timing information.
If you have to borrow money to be a timer, such as using your home equity or credit card advances for your trading stake, you shouldn’t market time.
The money you use for timing needs to be money that you can afford to lose, money that is left over after you’ve covered your savings, expenses, and other necessities. Your goal is to keep your losses as minimal and as infrequent as possible, but the reality is that the markets are risky.
You may have to develop a savings plan over several years to finance your new endeavor. That means that you may need to make changes in your spending habits, such as missing a vacation, driving a more modest car, or eating at fewer fancy restaurants. No matter how you do it, the best way to time the markets is with your own money. When it’s your money that you’re trading, you’re more likely to be extremely careful about what you do with it.
Before you start timing, make sure you have the following matters under con- trol and accounted for:
✓ Living expenses, especially food, mortgage, rent, and car payments:
If you can’t live the way you want on what you make, looking to market timing to save you from your current situation is not prudent. You have to have enough money for the basic necessities before you do anything else.
✓ Life insurance coverage: You can find basic life-insurance calculators online to help you determine how much coverage you need.
✓ Health insurance: The amount of health coverage you need is based on your family and your individual needs. Figure a worst-case scenario to be on the safe side.
✓ Retirement plan: Don’t time the markets unless you have adequate amounts of retirement funds available. I do trade my retirement fund, but I have done it for many years and am a professional trader. You have to be quite good at this before you start to do the same.
Do not put 100 percent of your retirement money into any single asset class. Diversify, and time the markets based on your experience and knowledge of trends and indicators.
✓ Savings plan for other needs, including vacations, day-to-day sur- prises, and especially your children’s college educations: Plenty of financial advisors and Web sites may be useful in giving you guidelines.
Eric Tyson’s book Investing For Dummies, 5th Edition (Wiley) does a good job of helping you through this very important point.
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Chapter 3: Preparing Yourself and Your Finances for Timing
✓ Emergency fund: You can never have enough money stashed away for emergencies, but three months of monthly expenses is a fairly good start.
Use your tax returns, credit card statements, and include all your monthly bills to determine where you stand financially.
After you take care of the matters in the bullet list, take as much debt as you can off the books. If you’ve got anything left over, you can start your timing endeavor. If you’re not there yet, you can prepare for that happy day by put- ting together your trading plan and doing some paper trading to test your mettle.
When you add up your expenses, include a special section for surprises like car repairs and dental bills. Those unexpected bills have a knack for popping up, and they can add up in a hurry.
Considering Personal Matters
Pretty much anything is possible in life, and you should be diligent in your preparation for timing, as well as living. Consider the following aspects of life before you start:
✓ Age: If you think that you won’t live long enough to make your money back if you have a disastrous trade, market timing isn’t for you. Give yourself some room to recover, as well as to understand why you failed.
✓ Health: Make sure that you’re in good physical and mental shape before you start. The stress of timing may truly be hazardous to your health if you have high blood pressure, heart disease, diabetes, or any other such condition that is not well treated.
✓ Dependents: If you have a family and are the only breadwinner, more conservative investing methods might be best for you.
✓ Job security: A steady job is your best source of trading income. Make sure that you’re secure in your occupation before you start timing.
✓ Your family situation: Make your spouse or significant other aware of your intentions and gauge his or her attitude. A cold stare from the person you’re sharing a home with is a good reason to paper trade as you gain experience or to start out with small lots.
✓ Know your own limits: If failure makes you mental, this isn’t for you, at least not until you get the hang of it and can come to grips with the fact that you won’t make brilliant trades every single time you step up to the plate.
Determining Your Net Worth
Calculating your net worth helps you to reach your final decision about whether you can actually afford to become a market timer.
Your net worth refers to the assets and cash you have after you subtract all your liabilities. And it’s the number that can tell you whether trading futures is a good idea.
Calculating your net worth is simple. You can do it by using easy-to-find software programs, such as Quicken, getting on the Internet and finding a calculator, or filling out a form from your bank or broker. You find a thorough explanation of how to calculate net worth in Eric Tyson’s Personal Finance For Dummies, 5th Edition (Wiley).
Pay special attention to the amounts you have in the following:
✓ Cash: The amount of money you can get your hands on quickly. This is the stuff that you have in money-market funds, bank accounts, your pocket, or in the cookie jar.
✓ Real estate: Your home, rental properties, second home, and even par- tial stakes in vacant lots, and so on.
✓ Stocks, bonds, and retirement accounts: You need to count this money because it’s there, not because you’re likely to use it, unless you’re plan- ning to time with your retirement fund. It’s foolish to cash these in and use the funds for timing, as the penalties are too high.
✓ Business assets: Include these assets but remember that — except for something like accounts receivables (cash owed to your business) — they’re likely to be difficult to cash in. Better to underestimate than overblow this category.
✓ Credit card balances, second mortgages, and adjustable-rate mortgages:
This dangerous category requires your utmost attendance. Be as complete here as you can, and consider the worst-case scenarios, such as your low- rate adjustable-mortgage payment resetting and rising significantly.
If your net worth is less than $200,000, you shouldn’t be trading at all, much less trading futures.
Differentiating between timing and investing is important. If your net worth is $200,000 or less, using managed timing strategies such as those used by mutual funds is perfectly acceptable.
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Chapter 3: Preparing Yourself and Your Finances for Timing
Never risk more than 10 percent of your net worth as a trading stake. If you have a net worth of at least $500,000 and you’re a well equipped, stable, and experienced trader, you can take more risk and use 20 percent of your net worth to trade, provided your expenses and long-term investments are cov- ered. However, risking more than 25 percent of your net worth in any one trading venue is a crapshoot and will likely get you into trouble.
Getting Tooled Up for Timing
You need two significant tools in order to be a successful market timer: a trading account and the right trading setup. The former is easy enough to set up, with a phone call or even through a Web site. The latter requires a bit more thought and expense.
Setting up your trading account
A timer’s trading account has two parts, the money market fund and what- ever you decide to buy and sell with the money you place in the account. I prefer online trading accounts because they enable me to enter just about any asset class with a few clicks on my mouse. I get instant order fills 99 per- cent of the time, and I get instant notification and proof of my order, which market maker the trade went through, how many shares I bought, and at what price.
The money market account is the hub of your account because it’s the first account that you open with your broker. It’s not just easy to use, it’s required. Aside from earning interest, its only other purpose is to be a place where your money waits for your next trade. Money will move in and out of this account as you trade, instead of your having to wire money to and from another account, such as your bank.
You can set up a money market account through any of several brokers. Three reliable and long-standing options are
✓ Fidelity (www.fidelity.com)
✓ Charles Schwab (www.charlesschwab.com)
✓ Ameritrade (www.ameritrade.com)
Your commission per trade, if you trade stocks or exchange-traded funds, usually is less than $10 per trade. That’s $10 or less to get in, and another $10 or less to get out. That’s not always the case, and I suggest you check each individual broker’s fee schedule. Some brokers charge more if your account doesn’t have a minimum amount. On the other hand, the more you trade, the more likely you are to get some sort of discount.
Money market funds charge a management fee but also pay interest. The man- agement fee is taken out on a daily basis, before your interest is calculated.
Building your timing toolkit
Detailed analysis and discipline make you a successful timer. But it doesn’t hurt to have the best tools at your disposal. Consider the following:
✓ First and foremost, you’re going to need a fast computer with as much memory as you can get. Most trading rigs now require at least 2.5MB of RAM (random access memory) to run large programs at high speed, and over 100MB of hard drive to store data. You’ll be running real-time quotes, reading charts, and looking at information from multiple sources simultaneously.
Ideally, a setup that lets you run two or more monitors is best. If you don’t have enough money to buy more than one monitor initially, it’s still worthwhile to get a computer that will let you run two monitors so you can expand your setup down the road.
✓ Get comfortable. Your furniture should include a good desk and chair.
A television set with cable and access to multiple news sources is also essential. I keep CNBC on all the time when I’m trading, with the sound off a fair amount of the time. This lets me look up once in a while to see whether something important is happening.
✓ Have backup systems. Aside from a good telephone setup, have at least one mode of reliable high-speed Internet connection available and a reg- ular modem. I use both DSL and cable in my setup, as well as a backup laptop with all my data in it and a handheld PDA that can give me access to the markets and my trading account if all else fails.
Trading and analysis software
You can find a lot of good programs out there, including E-Signal and Worden.com, as well as a bunch of Web-based trading sites that have good access to charts and indicators.
I give you more detail in Chapter 22, but here are a few of the ones that offer both free and paid charts and indicators: Stockcharts.com, Askresearch.com, Yahoo Finance, BigCharts.com, Prophet.net, and Marketwatch.com. Most of these programs and Web sites have all the basics, including real-time charts and the ability to run a good selection of analytical tools.
At the very least, your software should
✓ Be easy to access. If it’s not on the Web, it’s not worth it. And if it’s always down when you’re ready to trade, get another provider.
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Chapter 3: Preparing Yourself and Your Finances for Timing
✓ Have all the major indicators available. Make sure that you take the free trial of the service before pay for it and that you try everything — moving averages, oscillators, trend-line drawing tools, and tutorials. If it’s not easy to use, move along.
✓ Be well supported. Test all the support methods: chat, toll-free tele- phone, e-mail, and anything else that the service provider gives you. If they don’t take care of your problems fast, you know what to do.
Information sources
This is not as big a deal as it used to be, since the Internet will let you find whatever you want about an individual stock or news item, often for free. But for a subscription fee you can get The Wall Street Journal (www.wsj.com) or Investor’s Business Daily (www.investors.com). And to me it’s worth subscribing to these two Web sites, as I get a lot of good background informa- tion and company data there. Investor’s Business Daily’s Web site is all about timing the stock market and is worth the price I pay every year.