This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Using Investors' Emotions to Time the Stock Market? Yes, You Can

NEW YORK (TheStreet) -- Trying to time the market is a fool's errand that will end up costing you time and, more importantly, money in the form of trading costs, taxation on capital gains and the prospect of being un- or under-invested on up days.

At least, that's what proponents of the "buy and hold" strategy and executives at indexing firms like Vanguard advocate. Their argument, which draws a lot of water, is that the highest-paid mutual fund managers cannot "beat their respective index," after fees and expenses, with any degree of regularity.

Ok, that's fine, but we in the advisory world have clients to whom we report. And clients have these pesky things called "emotions."

Not everyone is comfortable plowing the majority of their net worth into something like the S&P 500 Index Fund (VOO). Plus, an index fund mimicking the performance of the S&P is unlikely to meet a high net worth client's objectives.

What if a client's primary objective is to "feel safe," or to "not take too much risk," or to "never lose more than 10% in a given year"....? Every client has different needs, and therefore every client should really have a different benchmark against which one can evaluate his portfolio. It's ignorant to think no measure of market timing is necessary to successfully manage money.

Can we time the market using investors' emotions as indicators? This is called behavioral finance, and I find it fascinating. But first we need to recognize that there is, in fact, an emotional cycle around which investors operate.

Where are we today in terms of the market's emotional cycle? Consulting the graphic below, I feel like we rounded the base of "optimism" sometime last year, with 2013 culminating in a stage of "excitement." If I'm right, then we are mid-"thrill" which, in itself, is pretty thrilling.

Courtesy of Northwestern Mutual

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASDAQ 4,352.6390 -17.1340 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs