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Timing the Market, Is it Possible? - February 27, 2020

Zacks Equity Research

In the long-run, does consistent market timing really matter to be a successful investor?

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 Consumer Discretionary stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Sleep Number Corporation (SNBR), Adidas AG (ADDYY), Afya Limited (AFYA), PlayAGS, Inc. (AGS), Choice Hotels International, Inc. (CHH)

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.

Fruitful market timing requires three key parts: 1) A solid sign to guide you when to get in and out of stocks (or securities, gold or different kinds of investments). 2) The capacity to act on the sign accurately. 3) The control to follow up 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: Why trying to time the tops and bottoms of the market is a dead end.

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: Make an effort not to sell in the midst of little crashes. Muster the courage to trust your gut and buy best in class stocks at a discount.

Warren Buffett has made his fortune based off this simple rule. 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. No matter what happens in the stock market, chances are that the stocks you own will eventually come back to their pre - crash value; hanging on to your original positions, or opportunistically averaging down, during market downs can be the shrew distraction to take. 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.

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, 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. 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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Sleep Number Corporation (SNBR) : Free Stock Analysis Report
 
Choice Hotels International, Inc. (CHH) : Free Stock Analysis Report
 
Adidas AG (ADDYY) : Free Stock Analysis Report
 
PlayAGS, Inc. (AGS) : Free Stock Analysis Report
 
Afya Limited (AFYA) : Free Stock Analysis Report
 
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