U.S. markets closed

When Does Market Timing Actually Work? - March 25, 2020

Zacks Equity Research

Have you ever dreamed of being that one in a million investor who has the talent to perfectly time the markets?

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.

Lost chances by those who attempt to time the market is a common mistake among those who trade their own accounts. How many traders have lost investing opportunities by choosing to wait for the Oils-Energy stocks to correct or reach attractive entry levels? Only for them to continue to move higher and achieve new all-time highs: Abraxas Petroleum Corporation (AXAS), Azure Power Global Ltd. (AZRE), Apache Corporation (APA), Antero Resources Corporation (AR), Alliance Resource Partners, L.P. (ARLP)

Dread and exuberance regularly propel investors into merely 'reacting' to market volatility, rather than envisioning market trends.

Fruitful market timing requires three key parts: 1) A solid sign to guide you when to get in and out of stocks (or securities, gold or different kinds of investments). 2) The capacity to act on the sign accurately. 3) The control to follow up 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: Never attempt and time tops and bottoms.

Abandoning the objective to time the tops and bottoms conclusively gives you the flexibility to profit, and extends your chance to benefit from the equity markets over the long-term whether your specific market timing calls are right or wrong.

Rule 2: Don't sell during small crashes - ride the storm out, or better yet, take advantage of the opportunity.

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 big difference between a stock market crash and small correction. If the companies you own are established and successful, they are likely to return to their pre - crash price before long, making holding on the wisest decision. 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, 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.

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.


This report can help you maximize your retirement nest-egg without the high risk of attempting to successfully time the markets. Click here for free report>>
 
Abraxas Petroleum Corporation (AXAS) : Free Stock Analysis Report
 
Apache Corporation (APA) : Free Stock Analysis Report
 
Alliance Resource Partners, L.P. (ARLP) : Free Stock Analysis Report
 
Antero Resources Corporation (AR) : Free Stock Analysis Report
 
Azure Power Global Ltd. (AZRE) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research