Being that unique investor who has the power to consistently time the market and always make a profit is the dream for most people who trade their own accounts.
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 Auto-Tires-Trucks stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: Adient PLC (ADNT), Autobytel Inc. (AUTO), Allison Transmission Holdings, Inc. (ALSN), Autoliv, Inc. (ALV), Polaris Industries Inc. (PII)
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: Never attempt 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 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 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 thought a notch higher and frequently goes on a buying binge when markets turn, purchasing additional shares of his favorite stocks at a major markdown and tuning in to his own recommendation of being greedy when others are scared, and being scared when others are greedy.
A Risk Adjusted Trading Strategy Should be Followed for Your Retirement Assets
It's only human that many succumb to greed and try and game the system by timing the market. But, think about this: Nobel Laureate William Sharpe found in 1975 that a market timer would need to be precise 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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Adient PLC (ADNT): Free Stock Analysis Report
Autoliv, Inc. (ALV): Free Stock Analysis Report
Allison Transmission Holdings, Inc. (ALSN): Free Stock Analysis Report
Polaris Industries Inc. (PII): Free Stock Analysis Report
Autobytel Inc. (AUTO): Free Stock Analysis Report
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Zacks Investment Research