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When Does Market Timing Actually Work? - October 08, 2020

Zacks Equity Research
·4 min read

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 Conglomerates stocks to correct or reach attractive entry levels? Only for them to continue to move higher and achieve new all-time highs: Barloworld Ltd. (BRRAY), China Resources Enterprise Ltd. (CRHKY), Bunzl PLC (BZLFY), Honeywell International Inc. (HON), Icahn Enterprises L.P. (IEP)

Anxiety and eagerness regularly lead investors into psychological traps because most investors take cues from past market moves and trends instead of attempting to anticipate potential market moves.

Successful market timing requires three key ingredients: 1) A reliable signal to tell you when to get in and out of stocks (or bonds, gold or other types of investments). 2) The ability to interpret the signal correctly. 3) The discipline to act 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: Attempting to time tops and bottoms is lose-lose situation.

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 small crashes - ride the storm out, or better yet, take advantage of the opportunity.

Warren Buffett has made an incredible piece of his fortune because of this basic standard. He cautions not to sell during little crashes, and encourages enduring them by concentrating on the long haul.

There is a noteworthy distinction between a complete market meltdown and a common 10% market correction. If you own shares of a company that is well - established and has strong fundamentals, they are probably going to rebound to their pre - crash prices eventually, thereby rendering holding on a wise 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. 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.

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>>
 
Barloworld Ltd. (BRRAY) : Free Stock Analysis Report
 
Honeywell International Inc. (HON) : Free Stock Analysis Report
 
Icahn Enterprises L.P. (IEP) : Free Stock Analysis Report
 
Bunzl PLC (BZLFY) : Free Stock Analysis Report
 
China Resources Enterprise Ltd. (CRHKY) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research