The Truth About Market Timing - February 03, 2020
Being that unique investor who has the power to consistently time the 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.
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 Aerospace stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Airbus Group (EADSY), CAE Inc (CAE), Curtiss-Wright Corporation (CW), Bae Systems PLC (BAESY), Ducommun Incorporated (DCO)
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.
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, thereby 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 thought a notch higher and frequently goes on a buying binge when markets turn, purchasing additional shares of his favorite stocks at a major markdown and tuning in to his own recommendation of being greedy when others are scared, and being scared when others are greedy.
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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Airbus Group (EADSY) : Free Stock Analysis Report
Ducommun Incorporated (DCO) : Free Stock Analysis Report
Bae Systems PLC (BAESY) : Free Stock Analysis Report
Curtiss-Wright Corporation (CW) : Free Stock Analysis Report
CAE Inc (CAE) : Free Stock Analysis Report
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