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The Market Timing Secrets No One Talks About - July 30, 2019

Zacks Equity Research

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

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.

Giving up too soon at the first sign of inconvenience often leads to missed opportunities among numerous individuals who try to trade on their own retirement. For example, many investors have forfeited immense chances waiting for the Retail-Wholesale stocks to correct, only see the latter achieve new highs, move higher and drive the buyer markets to record levels: Amazon.com, Inc. (AMZN), CENTRIC BRANDS INC. (CTRC), American Eagle Outfitters, Inc. (AEO), Asbury Automotive Group, Inc. (ABG), Advance Auto Parts, Inc. (AAP)

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.

Accomplished market timing requires three key components: 1) A dependable sign of when to get in and out of stocks. 2) The capacity to act upon signals quickly and accurately. 3) Have the stomach to act on market signals, no matter how counterintuitive the move may be.

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 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 an incredible piece of his fortune because of this basic standard. He warns not to sell during small crashes, and weather the storm by focusing on the long term.

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.'

When It Comes to Trading Your Retirement, A Risk Adjusted Trading Strategy Should be Followed

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.

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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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Asbury Automotive Group, Inc. (ABG) : Free Stock Analysis Report
 
Advance Auto Parts, Inc. (AAP) : Free Stock Analysis Report
 
American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
 
CENTRIC BRANDS INC. (CTRC) : Free Stock Analysis Report
 
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