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When Does Market Timing Actually Work? - October 03, 2019

Zacks Equity Research

Is the ability to time the markets more of a data-driven science or a 'gut - feeling' art?

Indeed, even among the individuals who don't seek to be the ideal market timer, many feel they can call a top and act in accordance. It is these tendencies that make investors sit on the sidelines and hang tight for a better chance 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 Medical stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: BioSpecifics Technologies Corp (BSTC), Cantel Medical Corp. (CMD), Champions Oncology, Inc. (CSBR), RadNet, Inc. (RDNT), TransEnterix, Inc. (TRXC)

Investment emotional triggers (fear and greed) can lead to costly mental mistakes by investors who typically fall into the trap of being a market follower instead of a market leader.

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 think of market timing success as a win or lose proposition. But there is a less notable, rather straightforward, successful market timing approach that has been utilized effectively time after time by astute investors like Warren Buffet.

Rule 1: Never attempt 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: Make an effort not to sell in the midst of little crashes. Muster the courage to trust your gut and buy best in class stocks at a discount.

Warren Buffett has made his fortune based of this straightforward guideline. He warns not to sell during small crashes, and weather the storm by focusing on the long term.

There is a major distinction between a financial crash and a mild market reset. 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 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. 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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BioSpecifics Technologies Corp (BSTC) : Free Stock Analysis Report
 
TransEnterix, Inc. (TRXC) : Free Stock Analysis Report
 
Cantel Medical Corp. (CMD) : Free Stock Analysis Report
 
Champions Oncology, Inc. (CSBR) : Free Stock Analysis Report
 
RadNet, Inc. (RDNT) : Free Stock Analysis Report
 
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