Is the ability to time the markets more of a data-driven science or a 'gut - feeling' art?
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 Conglomerates stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: Barloworld Ltd. (BRRAY), China Merchants Holdings International Co. (CMHHY), Bunzl (LON:BNZL) PLC (BZLFY), Crane Company (CR), Honeywell International Inc. (NYSE:HON)
Dread and exuberance regularly propel investors into merely 'reacting' to market volatility, rather than envisioning market trends.
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.
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 cautions not to sell during little crashes, and encourages enduring them by concentrating on the long haul.
There is a major distinction between a financial crash and a mild market reset. 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.'
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 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. Indeed, even a slight outperformance most likely wouldn't justify the efforts - and given that even the specialists for the most part come up short at it, market timing shouldn't be your exclusive methodology for investing, particularly when it comes to building your retirement nest egg.
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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Barloworld Ltd. (BRRAY): Free Stock Analysis Report
Honeywell International Inc. (HON): Free Stock Analysis Report
Crane Company (CR): Free Stock Analysis Report
Bunzl PLC (BZLFY): Free Stock Analysis Report
China Merchants Holdings International Co. (CMHHY): Free Stock Analysis Report
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Zacks Investment Research