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The Market Timing Secrets No One Talks About - April 29, 2020

Zacks Equity Research

Being that unique investor who has the power to constantly time the market and continually make a profit is the dream for most traders and investors.

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.

Individual investors who focus their efforts on timing the market typically miss chances. For example, many investors have overlooked chances to benefit from buying the Auto-Tires-Trucks stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Allison Transmission Holdings, Inc. (ALSN), Autoliv, Inc. (ALV), Adient PLC (ADNT), Autobytel Inc. (AUTO), Polaris Inc. (PII)

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

Productive market timing requires three key parts: 1) A dependable sign for when to get in and out of stocks. 2) The ability to follow up on the sign rapidly and precisely. 3) The ability to be completely unemotional and trust in the signal no matter the current market environment.

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 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 minor crashes - instead, have the patience to weather the storm, or even better, milk the opportunity to buy low.

Warren Buffett has made his fortune based off 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 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 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 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. 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.

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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Allison Transmission Holdings, Inc. (ALSN) : Free Stock Analysis Report
 
Autoliv, Inc. (ALV) : Free Stock Analysis Report
 
Polaris Inc. (PII) : Free Stock Analysis Report
 
Adient PLC (ADNT) : Free Stock Analysis Report
 
Autobytel Inc. (AUTO) : Free Stock Analysis Report
 
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