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The Truth About Market Timing - May 01, 2020

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There is no better feeling for an investor than trusting your gut or doing your research and timing the markets correctly, right?

Even among those who don't aspire to be the perfect market timer, many think they can call a top and act accordingly. It's at these times when investors choose to sit on the sidelines and wait for a 'perceived' better opportunity to invest in 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 Aerospace stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: CAE Inc (CAE - Free Report) , Bae Systems PLC (BAESY - Free Report) , Air Industries Group (AIRI - Free Report) , Curtiss-Wright Corporation (CW - Free Report) , Ducommun Incorporated (DCO - Free Report)

Fear and greed often lead investors into behavioral traps since most investors are followers who react, rather than anticipate 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: Attempting to time tops and bottoms is lose-lose situation.

Surrendering the objective to time the tops and bottoms gives you the adaptability to benefit and increase your odds to secure profits over the long-term, even if your calls aren't always 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 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 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 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.

If you'd like to learn how to 'super-charge' your retirement assets, get our free report:

Will You Retire as a Multi-Millionaire? 7 Things You Can Do Now.

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