Market timing is not a perfect science and can lead to disastrous results. For one thing, you cannot predict when a stock will go up or down. As such, you should not follow every move of the market. If you do, you will be likely to make emotional decisions. A better approach is to set aside a day each week to check on your portfolio’s value. You should avoid buying on days when stocks are cheap and selling them on days when they are expensive.
Moreover, you should avoid buying stock in a company that does not have a solid business plan. You should invest in well-established companies with a stable dividend policy. This will minimize your risk of permanent losses. Also, it’s wise to diversify your investments across the five main economic sectors to minimize market risk.
A common mistake made by investors is trying to time the market. By trying to predict when the market will drop or rise, they risk missing out on periods of exceptional returns. Similarly, if they withdraw their money from a stock during a downturn, they will miss out on the gains of an upswing.
Although it is possible to make a profit with perfect timing, this strategy is unlikely. The average person will only make small gains in the stock market. In fact, if you are lucky, you will be able to win by just a few percentage points. A perfect timer can earn a few thousand dollars or more. By comparison, the second and third place finishers were within 11% of the perfect timer. Moreover, the person who made a mistake on the market is likely to make losses in the long run.
Getting your timing right is critical when managing your portfolio. The wrong move can result in catastrophic results. For example, during the credit crisis in 2008, some investors sold their stocks when they were still cheap. This caused $147 billion of assets to be pulled out of U.S. stock mutual funds. Fortunately, the subsequent recovery yielded a 45.6% cumulative return from December 2008 to December 2010. Behavioral counseling is one way to avoid this harmful mistake and achieve superior results.
While there are numerous mistakes that can lead to disastrous results, the most common one is that of buying low and selling high. When it comes to timing, you must remember that stocks do not rise and fall in a uniform manner. Instead, they rise and fall suddenly. This makes market timing difficult. If you’re too early or too late, you risk missing out on the best chance for large gains.
Many traders make the mistake of relying on statistical indicators. Even if these indicators are accurate, they cannot guarantee that they will work every time. In the end, there is no one way to predict the market.