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The Market Timing Secrets No One Talks About - October 31, 2019

Zacks Equity Research

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

In fact, even among long-term investors who don't attempt to time the markets, being able to call the top of the market is a skill that many think they possess. This misguided confidence is often driving investors to sit on the sidelines and wait it out for better market opportunities.

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 Basic Materials stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: Balchem Corporation (BCPC), Arconic Inc. (ARNC), US Gold Corp (USAU), Trecora Resources (TREC), Mercer International Inc. (MERC)

Fear and greed often lead investors into behavioral traps since most investors are followers who react, rather than anticipate 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.

Surrendering the objective to time the tops and bottoms gives you the adaptability to benefit and increase your odds to secure profits over the long-term, even if your calls aren't always right.

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

Warren Buffett has made a great part of his fortune due to this simple rule. He cautions not to sell amid little crashes and to instead endure the temporary hardship and profit by concentrating on the long haul.

There is a key distinction between a small correction and a market crash. 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 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.

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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Balchem Corporation (BCPC) : Free Stock Analysis Report
 
Trecora Resources (TREC) : Free Stock Analysis Report
 
Arconic Inc. (ARNC) : Free Stock Analysis Report
 
Mercer International Inc. (MERC) : Free Stock Analysis Report
 
US Gold Corp (USAU) : Free Stock Analysis Report
 
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