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When Does Market Timing Actually Work? - June 15, 2020

There is no better feeling for an investor than trusting your gut or doing your research and timing the markets correctly, right?

Indeed, even among those investors who don't try to consistently time the markets, many think they can still call a top and act opportunistically. It's at these times when an investor who speculates often sits on the sidelines and looks for better opportunities to put money into the market.

Lost chances by those who attempt to time the market is a common mistake among those who trade their own accounts. How many traders have lost investing opportunities by choosing to wait for the Utilities stocks to correct or reach attractive entry levels? Only for them to continue to move higher and achieve new all-time highs: American Water Works Company, Inc. (AWK), Brookfield Infrastructure Partners LP (BIP), Artesian Resources Corporation (ARTNA), Atlantic Power Corporation (AT), Pinnacle West Capital Corporation (PNW)

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.

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: Never attempt and time tops and bottoms.

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 of this straightforward guideline. He warns not to sell during small crashes, and weather the storm by focusing on the long term.

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 just human that many surrender to emotions and attempt and game the framework 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. 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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American Water Works Company, Inc. (AWK): Free Stock Analysis Report
 
Pinnacle West Capital Corporation (PNW): Free Stock Analysis Report
 
Brookfield Infrastructure Partners LP (BIP): Free Stock Analysis Report
 
Artesian Resources Corporation (ARTNA): Free Stock Analysis Report
 
Atlantic Power Corporation (AT): Free Stock Analysis Report
 
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