What is Timing risk?
The risk that something dramatic happens soon after you make an investment which causes it to plunge in value.
How this risk plays out in the real world
May 03, 2017: AMD’s stock plunges to biggest loss in over 12 years
February 02, 2017: Ralph Lauren CEO quits, stock plunges
Sep 02, 2010: Oil Rig Explodes in the Gulf of Mexico
Connection to other risks
This risk relates to Company risk. Entire markets won’t drop 25% in a day, but the price of a corporation’s shares can fall this much if it reveals seriously bad news.
Read the glossary definition of Dollar cost averaging.
How investors can manage Timing risk
- If you receive a large sum of money, don’t “throw down” all of it on a particular corporation at one time. Instead, invest a fraction of it every month. What’s the hurry if it’s to be a long-term investment? BTW, this approach is called dollar cost averaging.
- Don’t invest a lot of money into a volatile corporation before a quarterly earnings announcement as any bad news can be seized upon to send the stock reeling.
A final word
The number of things that can go wrong with an investment is greater than one might imagine. For BP, it was the explosion of the Deepwater Horizon drilling rig in the Gulf of Mexico. For Toyota, it was runaway cars and the deaths attributed to them. For Herbalife, it was a few pointed questions by a hedge fund manager on a quarterly conference call that had the stock plunging right in the middle of the day! Stuff happens. So, it pays to build up your ownership of a corporation over time so that you are less susceptible to an event that causes the share price to drop.
Finally, if you look at the stock charts of corporations like BP and Toyota, you can see that they have recovered or are in the process of recovering from their moment of crisis. If you didn’t previously own these corporations, it appears that the dramatic events that drove their stock prices down were great buying opportunities.