The Keys to Successfully Timing the Markets - July 29, 2020
In the long-run, does consistent market timing really matter to be a successful investor?
In fact, even among long-term investors who don't attempt to time the markets, being able to call the top of the market is a skill that many think they possess. This misguided confidence is often driving investors to sit on the sidelines and wait it out for better market opportunities.
Giving up too soon at the first sign of inconvenience often leads to missed opportunities among numerous individuals who try to trade on their own retirement. For example, many investors have forfeited immense chances waiting for the Business Services stocks to correct, only see the latter achieve new highs, move higher and drive the buyer markets to record levels: Bioptix, Inc. (RIOT), The Hackett Group, Inc. (HCKT), AstroNova, Inc. (ALOT), Amadeus IT Group SA (AMADY), Agora, Inc. Sponsored ADR (API)
Anxiety and eagerness regularly lead investors into psychological traps because most investors take cues from past market moves and trends instead of attempting to anticipate potential market moves.
Accomplished market timing requires three key components: 1) A dependable sign of when to get in and out of stocks. 2) The capacity to act upon signals quickly and accurately. 3) Have the stomach to act on market signals, no matter how counterintuitive the move may be.
Many investors think of market timing success as a win or lose proposition. But there is a less notable, rather straightforward, successful market timing approach that has been utilized effectively time after time by astute investors like Warren Buffet.
Rule 1: Attempting to time tops and bottoms is lose-lose situation.
Surrendering the objective to time the tops and bottoms gives you the adaptability to benefit and increase your odds to secure profits over the long-term, even if your calls aren't always right.
Rule 2: Don't sell during minor crashes - instead, have the patience to weather the storm, or even better, milk the opportunity to buy low.
Warren Buffett has made a great part of his fortune due to this simple rule. He benefits by focusing on the long - term and buying high quality stocks at a discount during large market corrections to profit down the road.
There is a major distinction between a financial crash and a mild market reset. 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 thought one step further by often buying outsized positions in value stocks he likes across the board when markets turn, essentially leveraging his bottoms-up analysis and stock picking acumen.
When It Comes to Trading Your Retirement, A Risk Adjusted Trading Strategy Should be Followed
It's only human that many succumb to greed and try and game the system 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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Bioptix, Inc. (RIOT): Free Stock Analysis Report
AstroNova, Inc. (ALOT): Free Stock Analysis Report
Agora, Inc. Sponsored ADR (API): Get Free Report
The Hackett Group, Inc. (HCKT): Free Stock Analysis Report
Amadeus IT Group SA (AMADY): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.