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When Does Market Timing Actually Work? - August 04, 2020

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 Auto-Tires-Trucks stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Allison Transmission Holdings, Inc. (ALSN), Autoliv, Inc. (ALV), Autobytel Inc. (AUTO), Adient PLC (ADNT), Polaris Inc. (PII)

Fear and greed often lead investors into behavioral traps since most investors are followers who react, rather than anticipate market moves.

Productive market timing requires three key parts: 1) A dependable sign for when to get in and out of stocks. 2) The ability to follow up on the sign rapidly and precisely. 3) The ability to be completely unemotional and trust in the signal no matter the current market environment.

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: Why trying to time the tops and bottoms of the market is a dead end.

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: Try not to sell amid little crashes - instead exploit the opportunity by buying.

Warren Buffett has made a great part of his fortune due to this simple rule. He cautions not to sell during little crashes, and encourages enduring them by concentrating on the long haul.

There is a noteworthy distinction between a complete market meltdown and a common 10% market correction. The theory is that if you like and bought a stock at a previous valuation prior to the correction, you should love the opportunity to this same at a steep discount since the underlying fundamentals are most likely still intact. Warren Buffett takes this idea one step further and often goes on a buying spree when markets turn, essentially buying additional shares of his top stock picks at a big discount and listening to his own advice, 'Be fearful when others are greedy and greedy when others are fearful.'

A Risk Adjusted Trading Strategy Should be Followed for Your Retirement Assets

It's only human that many succumb to greed and try and game the system by timing the market. But consider this: Nobel Laureate William Sharpe found in 1975 that a market timer would have to be accurate 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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Allison Transmission Holdings, Inc. (ALSN): Free Stock Analysis Report

Autoliv, Inc. (ALV): Free Stock Analysis Report

Polaris Inc. (PII): Free Stock Analysis Report

Adient PLC (ADNT): Free Stock Analysis Report

Autobytel Inc. (AUTO): 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.

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