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The Market Timing Secrets No One Talks About

Zacks Research Staff

Being that special investor who has the power to consistently time market and always make a profit is the dream for most people who trade their own accounts.

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.

Missed investing opportunities by the “exit at the first sign on trouble” market timer is a common pattern amongst many self-directed investors. Case in point: How many investors have missed huge opportunities waiting for the FAANG stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull markets to record levels.

Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), Trip Advisor (NASDAQ:TRIP), Twilio (NASDAQ:TWLO), Amazon(NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Microsoft (NASDAQ:MSFT)

Fear and greed often lead investors into behavioral traps because most investors are followers, and 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 and other types of investments). 2) The ability to interpret the signal correctly and 3) The discipline to act on it.

The popular image of market timing is that it calls for making drastic, all-or-nothing moves at the precise, exact market top or bottom. There is a less well-known, rather simple market timing approach that has been used successfully by savvy investors like Warren Buffet for decades.

Rule 1: Never try and time tops and bottoms.

Abandoning the goal to time the tops and bottoms precisely gives you the flexibility to profit, and increasing your chances to lock in built-up profits even if your calls aren’t exactly 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 warns not to sell during small crashes, and weather the storm by focusing on the long term.

There is a big difference between a stock market crash and small correction. 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.”

Whatever Your View on Market Timing, 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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TripAdvisor, Inc. (TRIP) : Free Stock Analysis Report
 
Netflix, Inc. (NFLX) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Facebook, Inc. (FB) : Free Stock Analysis Report
 
Alphabet Inc. (GOOG) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
 
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