Given the market's rally between 2012 and 2013, we almost forgot how volatile the stock market can actually be.
That has all changed in 2014. While we endured the worst January in four years, we have since seen the market rise and fall and rise again in somewhat of a rollercoaster ride. In fact, despite its various setbacks, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has today hit its highest level in over five-and-a-half years, hovering just below 5,500 points – a level which has not been seen since prior to the global financial crisis.
However, the volatility has got investors wondering whether they can benefit from the constant ups and downs by actively buying and selling. That is, trying to analyse trends and buying shares and then selling them at a slightly higher price just a few days later – a method we refer to as 'timing the market'.
Unfortunately, there are many problems with this method of 'investing'. Two of the most obvious problems include the fact that it is impossible to know which direction the market or any given stock will go in the short-term (although you might get lucky from time to time, it's by no means a reliable strategy), while there are also greater tax implications for any gains realised from investments held for less than 12 months.
The good news is, there is a more strategic way of benefiting from the market's volatility. Although it's never pleasant to watch your portfolio drop in value when the market gets moody, it can certainly open up opportunities to buy quality companies at cheaper prices which, once acquired, should be held onto for the long haul.
Even better, although the overall market has climbed to its highest point, there are plenty of companies which are still trading at depressed levels which you could consider taking advantage of. These include Telstra Corporation Ltd (ASX: TLS), Coca-Cola Amatil Ltd (ASX: CCL), Amcor Limited (ASX: AMC), Mortgage Choice Limited (ASX: MOC) and Westfield Group (ASX: WDC).
Foolish takeaway
Although it can be tempting to try your luck at making a quick gain, the buy and hold method of investing has time-and-time-again proven itself to be a more rewarding strategy over the long-term.
