When Does Market Timing Actually Work? - June 10, 2020
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.
Giving up too soon at the first sign of inconvenience often leads to missed opportunities among numerous individuals who try to trade on their own retirement. For example, many investors have forfeited immense chances waiting for the Consumer Staples stocks to correct, only see the latter achieve new highs, move higher and drive the buyer markets to record levels: BrownForman Corporation (BF.B), Blue Apron Holdings, Inc. (APRN), Aramark (ARMK), Associated British Foods PLC (ASBFY), Ahold NV (ADRNY)
Fear and greed often lead investors into behavioral traps since most investors are followers who react, rather than anticipate market moves.
Accomplished market timing requires three key components: 1) A dependable sign of when to get in and out of stocks. 2) The capacity to act upon signals quickly and accurately. 3) Have the stomach to act on market signals, no matter how counterintuitive the move may be.
Market timing is commonly perceived as the ability to guess the exact market top or bottom and make moves accordingly. However, there is a less common, rather straightforward market timing strategy that has been utilized effectively by insightful financial specialists like Warren Buffet for a considerable length of time.
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: 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 a great part of his fortune due to this simple rule. 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 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.
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. 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.
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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BrownForman Corporation (BF.B) : Free Stock Analysis Report
Aramark (ARMK) : Free Stock Analysis Report
Associated British Foods PLC (ASBFY) : Free Stock Analysis Report
Ahold NV (ADRNY) : Free Stock Analysis Report
Blue Apron Holdings, Inc. (APRN) : Free Stock Analysis Report
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