In the long-run, does consistent market timing really matter to be a successful investor?
In fact, even among long-term investors who don't attempt to time the markets, being able to call the top of the market is a skill that many think they possess. This misguided confidence is often driving investors to sit on the sidelines and wait it out for better market opportunities.
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 Transportation stocks to correct, only see the latter achieve new highs, move higher and drive the buyer markets to record levels: ArcBest Corporation (ARCB), American Airlines Group Inc. (AAL), Atlas Air Worldwide Holdings (AAWW), Air Transport Services Group, Inc (ATSG), Air China Ltd. (AIRYY)
Fear and greed often lead investors into behavioral traps since most investors are followers who react, rather than anticipate market moves.
Productive market timing requires three key parts: 1) A dependable sign for when to get in and out of stocks. 2) The ability to follow up on the sign rapidly and precisely. 3) The ability to be completely unemotional and trust in the signal no matter the current market environment.
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: 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: Try not to sell amid little crashes - instead exploit the opportunity by buying.
Warren Buffett has made his fortune based off 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 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 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.'
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. 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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ArcBest Corporation (ARCB) : Free Stock Analysis Report
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
Air Transport Services Group, Inc (ATSG) : Free Stock Analysis Report
Air China Ltd. (AIRYY) : Free Stock Analysis Report
Atlas Air Worldwide Holdings (AAWW) : Free Stock Analysis Report
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