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The Truth About Market Timing - May 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.

Indeed, even among the individuals who don't seek to be the ideal market timer, many feel they can call a top and act in accordance. It is these tendencies that make investors sit on the sidelines and hang tight for a better chance to put money into the market.

Missed investing opportunities by exiting at the first sign of trouble is a common pattern among many self-directed investors. Case in point: How many investors have missed huge opportunities waiting for the Business Services stocks listed below to correct, only to see them reach new highs, climb higher and drive the bull market to record levels: AstroNova, Inc. (ALOT), Amadeus IT Group SA (AMADY), Aqua Metals, Inc. (AQMS), The Hackett Group, Inc. (HCKT), Bioptix, Inc. (RIOT)

Anxiety and eagerness regularly lead investors into psychological traps because most investors take cues from past market moves and trends instead of attempting to anticipate potential 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.

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: Attempting to time tops and bottoms is lose-lose situation.

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 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 of this straightforward guideline. He cautions not to sell amid little crashes and to instead endure the temporary hardship and profit by concentrating on the long haul.

There is a major distinction between a financial crash and a mild market reset. 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 idea further by frequently going on purchasing binges when the markets turn, basically purchasing extra shares of his top stock picks at a major markdown and doubling - down on his very own recommendations.

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. Indeed, even a slight outperformance most likely wouldn't justify the efforts - and given that even the specialists for the most part come up short at it, market timing shouldn't be your exclusive methodology for investing, particularly when it comes to building your retirement nest egg.

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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AstroNova, Inc. (ALOT) : Free Stock Analysis Report
 
The Hackett Group, Inc. (HCKT) : Free Stock Analysis Report
 
Aqua Metals, Inc. (AQMS) : Free Stock Analysis Report
 
Bioptix, Inc. (RIOT) : Free Stock Analysis Report
 
Amadeus IT Group SA (AMADY) : Free Stock Analysis Report
 
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