Being that unique investor who has the power to consistently time the market and always make a profit is the dream for most people who trade their own accounts.
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.
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: ABM Industries Incorporated (ABM - Free Report) , Adecco SA (AHEXY - Free Report) , Advanced Disposal Services Inc. (ADSW - Free Report) , Alliance Data Systems Corporation (ADS - Free Report) , Accenture PLC (ACN - Free Report)
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.
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.
Many investors believe that market timing is a short-term investment strategy. There is a less known, more effective, longer-term market timing approach that has been used successfully by astute investors like Warren Buffet.
Rule 1: Why trying to time the tops and bottoms of the market is a dead end.
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: 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 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 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 thought a notch higher and frequently goes on a buying binge when markets turn, purchasing additional shares of his favorite stocks at a major markdown and tuning in to his own recommendation of being greedy when others are scared, and being scared when others are greedy.
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.
Actively trading for alpha, outsized, short - term gains through market timing and other high - risk trading strategies is fine with a small portion of your investable assets, but for your longer - term retirement assets, a risk -adjusted focused investment solution generally makes more sense.
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