There is no better feeling for an investor than trusting your gut or doing your research and timing the markets correctly, right?
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 Conglomerates stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Honeywell International Inc. (HON - Free Report) , China Merchants Holdings International Co. (CMHHY - Free Report) , Crane Company (CR - Free Report) , Barloworld Ltd. (BRRAY - Free Report) , Bunzl PLC (BZLFY - Free Report)
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.
Forget tracking for market tops or bottoms to expand your odds for success with a longer timeline and give yourself the flexibility to eventually profit, regardless of whether your calls are spot-on or way off-base.
Rule 2: Make an effort not to sell in the midst of little crashes. Muster the courage to trust your gut and buy best in class stocks at a discount.
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 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 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 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. Even a slight outperformance probably wouldn't be worth the energy - and given that even the experts generally fail at it, market timing shouldn't be your exclusive investing strategy of choice, especially using assets earmarked for your retirement.
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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