Sunday, June 23, 2024

There are multiple strategies that boast of selling stock before the market drops and buying before it rises, but the reality is that these strategies rarely work reliably and even fewer people have the ability to execute them. A new study found only 30 timing strategies out of 720 that were effective, and even these strategies were based on luck, not skill.

The strategy that scored the best worked between 2001 and 2002 in various developed country stock markets outside the United States, generating an annualized 5.5 percent return. However, any slight alteration to this strategy caused it to lose effectiveness. Moreover, one winning method is unlikely to remain a secret for long. In addition, most professional traders cannot successfully time the market, and even those who do so successfully can’t sustain their success indefinitely.

While the idea of outsmarting the market is appealing, most people will make better returns if they accept that they can’t beat the market. Instead, they can focus on minimizing costs and using diversified, low-fee index funds to generate a modest yet solid return. The same applies to picking individual stocks. Over the long term, successful stock-picking is also extremely rare.

Striving to be average may not be very inspiring, but it could be the wise choice. Rather than aiming to beat the market by buying and selling at opportune moments, most investors are likely to succeed by simply matching the market returns and avoiding costly unforced errors. While this isn’t necessarily easy, it’s a far better approach for most investors than trying to outmaneuver the market.

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