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The Truth About Market Timing - December 11, 2019

Zacks Equity Research

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

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.

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 Construction stocks at the first opportunity, by attempting to buy them during a pullback only to see these stocks accomplish new unsurpassed highs: Apergy Corporation (APY), Aspen Aerogels, Inc. (ASPN), Alfa Laval AB Unsponsored ADR (ALFVY), Altair Engineering Inc. (ALTR), Great Lakes Dredge & Dock Corporation (GLDD)

Dread and exuberance regularly propel investors into merely 'reacting' to market volatility, rather than envisioning market trends.

Accomplished market timing requires three key components: 1) A dependable sign of when to get in and out of stocks. 2) The capacity to act upon signals quickly and accurately. 3) Have the stomach to act on market signals, no matter how counterintuitive the move may be.

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 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 benefits by focusing on the long - term and buying high quality stocks at a discount during large market corrections to profit down the road.

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. 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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Apergy Corporation (APY) : Free Stock Analysis Report
 
Aspen Aerogels, Inc. (ASPN) : Free Stock Analysis Report
 
Great Lakes Dredge & Dock Corporation (GLDD) : Free Stock Analysis Report
 
Altair Engineering Inc. (ALTR) : Free Stock Analysis Report
 
Alfa Laval AB Unsponsored ADR (ALFVY) : Free Stock Analysis Report
 
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