If you’re watching stocks on the rise, it’s important to determine if they are worth your investment or not

Investors always look for stocks on the rise that have yet to reach their peak price. But when it comes to your investment strategy, one of the least productive things you can do is try to “time” the market. By that, I mean trying to sell good stocks at what looks to you like a peak price, in hopes of buying rising stocks at lower prices.

Sometimes investors sell rising stocks at what looks like a high price, only to find that some new information comes along that spurs the rising stock to much higher prices.

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Stocks on the rise: Why momentum investors rarely stay on top

If you look at a list of top-performing mutual funds or investment counsellors, you’ll often find so-called “momentum investors” at the top of the list for periods of one year or so. But it’s hard act to maintain for much longer than that. In fact, a year later, you’ll often see a different set of momentum investors at the top of the list.

Momentum investors use a number of formulas for their buy and sell decisions, but they all come down to “buy on strength and sell on weakness.” They tend to pile into the same stocks all at once so that the gains that follow are something of a self-fulfilling prophecy.

The trouble is that when a stock’s rise begins to fade, momentum investors all start getting out as a group. That causes violent fluctuations in the share price.

In contrast, if you look at a list of top performers over a period of a decade or two, the top spots usually belong to people who invest much as we do—who look at all the excruciating detail and temper it with a consistent blend of diversification and common sense.

Trying to buy stocks that are going up is a much riskier venture than it may initially seem. Momentum investing implies that you can predict what will happen to a stock’s share price, but many factors that you can’t possibly anticipate will determine how the price performs.

In effect, you are gambling on the price—and that’s a gamble many investors lose.

Avoid selling stocks on the rise too early

It’s all too easy to sell a stock that looks like it’s headed for a downturn, only to buy another that is headed for a collapse. For that matter, if you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early.

You can always find a reason to sell. Market commentators are continually thinking up new ones, based on recent market strength or weakness, historical market patterns, political or economic predictions, changes in tax policies—the list is endless. This is a good thing. After all, you can only buy a stock if somebody who owns it wants to sell.

Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

Stocks on the rise: Value stocks can lower your portfolio’s volatility

Most successful investors hold some growth stocks and some value stocks at any given time, depending on where they see the best opportunities. Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and they have the potential to rise.

Many technology stocks, such as Intel, symbol INTC on Nasdaq (a stock we analyze in our Wall Street Stock Forecaster newsletter), started out as growth picks, but have started to transition into value stocks. Growth stocks and value stocks can make a winning combination. A growth stock can be a top performer when the company is growing. However, a single quarter of bad earnings can send it into a deep, but often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.

Do you like to watch for stocks on the rise? Have you invested in any? If so, how have they performed for you? Share your story with us in the comments.