If your plan is to outperform the stock market over the long-term, you absolutely have to know the market's current state of health. Is it in a healthy uptrend, meaning it is safe to invest, or is it showing signs of an unhealthy downtrend? If it's the later, you should be out on the sidelines in the safety of an ISA cash park.
An ISA cash park can offer you a safe haven in a downward trending market, allowing you to protect your gains until it's a good time to reinvest, while retaining all the tax advantages of your Stocks & Shares ISA portfolio.
Timing your move into an ISA cash park
So when's the right time to move into an ISA cash park? The best way to determine the overall trend and direction of the market is to follow, interpret and understand what the general market averages are doing every day.
In his bestselling book, 'How to make money in stocks', William O’Neil said: “Don’t let anyone tell you that you can’t time the market.”
According to O’Neil, the erroneous belief that no one can time the market evolved more than 30 years ago when most funds that tried it were not successful. This is because they had to buy and sell at exactly the right time but due to their asset size problems, it took weeks to raise cash and weeks to re-enter or get back invested into the market. Therefore, the top management at these funds imposed rules on their fund managers that required them to remain fully invested (95% to 100% of assets).
If you want to make big money in funds over the long-term, you must observe and study the major indexes carefully. Here they are:
• The Nasdaq Composite
• The S&P 600
• The S&P 500
• The Dow Jones Industrial Average
As well as watching these four indexes, the action and behaviour of the highest quality stocks (the leaders) is also a key indicator of future market direction.
By studying these four indexes plus the action of leading stocks each and every day, you will come to realise meaningful changes in the daily behaviour at key turning points like market tops and bottoms and learn how to capitalise on them. As O’Neil explains…
“Recognising when the market has hit a top or has bottomed out is frequently 50% of the whole complicated ballgame.”
'Buy and hold' vs using an ISA cash park
The alternative to timing the market is to follow the flawed 'buy and hold' investment strategy, which simply does not work. Ask anybody who was following a 'buy and hold' strategy and who bought a technology fund just before the 2000-2002 bear market. They would have probably seen catastrophic losses in the region of 75% to 90%. To make up for a loss like that, it can take you as much as a decade or more just to get back to even.
Take a look at this example:
• A loss of 33% requires a 50% gain just to get back even.
• A loss of 50% requires a 100% gain just to get back even.
• A loss of 90% requires a 900% gain just to get back even.
This is why it's so important to preserve your capital and get out of the market as soon as you see the first signs of the market’s health deteriorating. When the confirmation is made, you need to move into the safety of an ISA cash park such as Fidelity's ISA Cash Park.
The need for decisive action
Does your current adviser tell you when the market’s health is deteriorating? Do they advise you to switch out of the market at the first signs of a bear market? Do they suggest that you switch into a cash based fund, like an ISA cash park, to protect and preserve your capital?
If they don’t, why not?
You see, after you identify the first definite indications of a market top, you can’t wait around. You have to quickly get out of your chosen fund or funds before real weakness develops. Lightning fast action is critical to ensure you do not give back your hard-earned gains.
Unless you are able to get in and get out of the market at the right time, you will have difficulty making headway.
You or your adviser might be able to pick the best fund in the world, but unless you get in sync with the market’s trend, the fund will not achieve the returns you desire. Getting in sync with the market is not easy and takes countless hours of practice, taking many years to master.
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