Are you a good market timer? Studies have actually already looked into that very question, and the answer is: probably not. Exchange traded fund (ETF) investors are apparently particularly bad at it, but there’s something you can do about that.
ETF investors have been found to not be very good market timers, primarily because they’re mostly traded by retail investors and day traders. That group of people are generally viewed as less informed and more emotional than the market pros. [How to Create Your Own Strategy.]
According to a recent TrimTabs study, ETF investors are so bad at picking the right time to buy or short-sell the equity markets that those doing exactly the opposite of what ETF players did in the past 10 years would have ended up making sevenfold profits, reports Oliver Ludwig for Index Universe. At the same time, the S&P 500 lost 18%.
We know from talking with our readers that they’re a smart, well-educated group of people. Give ETF investors a little credit – they’re certainly smart enough to know that ETFs are better than most actively managed mutual funds. They realize that most of those mutual funds underperform their benchmarks and they know it’s better to just buy the benchmark.
The results of this study signal one thing: to be successful, you have to have a strategy. Buying and selling on emotions and hunches is a surefire path to trouble. [How to Cope With Indefinable Risks.]
What can you do?
- Implement a simple strategy. Studies have shown time and again that there’s a direct correlation between how complicated a strategy is and how often you’ll use it. Keep it simple, silly.
- Have a stop loss. “It’s easy to buy and hard to sell,” goes the adage. Make selling easier by knowing when you’ll do it. And then do it.
- A simple strategy we suggest is trend following by using the 200-day moving average to determine when you buy and sell. You’re buying when a trend is there, and only when the trend is there. This allows you to check your emotions at the door. [How to Follow Trends.]
For more stories about trend following, visit our trend following category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.