Have you ever dreamed of being that one in a million investor who has the talent to perfectly time the markets?
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.
Missed investing opportunities by exiting at the first sign of trouble is a common pattern among many self-directed investors. Case in point: How many investors have missed huge opportunities waiting for the Medical stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: RadNet, Inc. (RDNT), Champions Oncology, Inc. (CSBR), BioSpecifics Technologies Corp (BSTC), Cantel Medical Corp. (CMD), TransEnterix, Inc.
Dread and exuberance regularly propel investors into merely 'reacting' to market volatility, rather than envisioning market trends.
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 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: Never try and time tops and bottoms.
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: 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 his fortune based off this simple rule. He cautions not to sell amid little crashes and to instead endure the temporary hardship and profit by concentrating on the long haul.
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 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 just human that many surrender to emotions and attempt and game the framework 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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