Being that unique investor who has the power to constantly time the market and continually make a profit is the dream for most traders and investors.
Indeed, even among the individuals who don’t seek to be the ideal market timer, many feel they can call a top and act in accordance. It is these tendencies that make investors sit on the sidelines and hang tight for a better chance to put money into the market.
Individual investors who focus their efforts on timing the market typically miss chances. For example, many investors have overlooked chances to benefit from buying the Business Services stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: AstroNova, Inc. (ALOT), ABM Industries Incorporated (ABM), Accenture PLC (NYSE:ACN), Alliance Data Systems Corporation (NYSE:ADS), Advanced Disposal Services Inc. (ADSW)
Dread and exuberance regularly propel investors into merely ‘reacting’ to market volatility, rather than envisioning market trends.
Successful market timing requires three key ingredients: 1) A reliable signal to tell you when to get in and out of stocks (or bonds, gold or other types of investments). 2) The ability to interpret the signal correctly. 3) The discipline to act on it.
Market timing is commonly perceived as the ability to guess the exact market top or bottom and make moves accordingly. However, there is a less common, rather straightforward market timing strategy that has been utilized effectively by insightful financial specialists like Warren Buffet for a considerable length of time.
Rule 1: Never try and time tops and bottoms.
Abandoning the goal to time the tops and bottoms precisely gives you the flexibility to profit, thereby increasing your chances to lock in built-up profits even if your calls aren’t exactly right.
Rule 2: Don’t sell during small crashes – ride the storm out, or better yet, take advantage of the opportunity.
Warren Buffett has made his fortune based off this simple rule. He cautions not to sell during little crashes, and encourages enduring them by concentrating on the long haul.
There is a big difference between a stock market crash and small correction. No matter what happens in the stock market, chances are that the stocks you own will eventually come back to their pre – crash value; hanging on to your original positions, or opportunistically averaging down, during market downs can be the shrew distraction to take. Warren Buffett takes this idea further by frequently going on purchasing binges when the markets turn, basically purchasing extra shares of his top stock picks at a major markdown and doubling – down on his very own recommendations.
When It Comes to Trading Your Retirement, A Risk Adjusted Trading Strategy Should be Followed
It’s just human that many surrender to emotions and attempt and game the framework by timing the market. But, think about this: Nobel Laureate William Sharpe found in 1975 that a market timer would need to be precise 74% of the time to beat a passive portfolio. Indeed, even a slight outperformance most likely wouldn’t justify the efforts – and given that even the specialists for the most part come up short at it, market timing shouldn’t be your exclusive methodology for investing, particularly when it comes to building your retirement nest egg.
Chasing alpha, outsized, short – term returns through market timing and other high – risk bets is acceptable only within a small part of your investable resources, however for your long – term retirement assets a ‘risk-adjusted’ investment discipline is what largely bodes well.
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