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 Consumer Discretionary stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Amaya Inc. (TSG), AMC Entertainment Holdings, Inc. (AMC), AMC Networks Inc. (AMCX), American Woodmark Corporation (AMWD), Century Casinos, Inc. (
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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.
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.
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: Never try and time tops and bottoms.
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: 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 his fortune based of this straightforward guideline. 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 big difference between a stock market crash and small 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.'
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 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.
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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