Is the ability to time the markets more of a data-driven science or a 'gut - feeling' art?
Indeed, even among those investors who don't try to consistently time the markets, many think they can still call a top and act opportunistically. It's at these times when an investor who speculates often sits on the sidelines and looks for better opportunities 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 Oils-Energy stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Hess Corporation (HES - Free Report) , Ameresco, Inc. (AMRC - Free Report) , Antero Midstrm (AM - Free Report) , Nabors Industries Ltd. (NBR - Free Report) , Panhandle Royalty Company
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.
The popular image of market timing is that it calls for making drastic, all-or-nothing moves at the precise, exact market top or bottom. There is a less well-known, rather simple market timing approach that has been used successfully by savvy investors like Warren Buffet for decades.
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: 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 an incredible piece of his fortune because of this basic standard. He warns not to sell during small crashes, and weather the storm by focusing on the long term.
There is a key distinction between a small correction and a market crash. If you own shares of a company that is well - established and has strong fundamentals, they are probably going to rebound to their pre - crash prices eventually, thereby rendering holding on a wise decision. 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 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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