That old investment adage that past performance doesn't guarantee future returns is still true, much to the chagrin of investors everywhere who wish they could predict the market.
Capitalize on a Near-Term Investing Trend
A near-term investing strategy aims to capitalize on more immediate market triggers.
A near-term investing strategy may be the closest investors come to having a market crystal ball, though it's a mostly near-sighted one. The strategy aims to improve returns by playing on events that are expected to occur sooner rather than later.
The idea is for investors to optimize their portfolios to adapt to a specific event or short-term prediction. In many ways, active investors do this already with longer-term investments – making informed decisions to buy and sell using information they know about an industry or firm, such as how less demand for a product in the coming years will affect a sector, or how a Federal Reserve interest rate change will impact an asset class.
In a volatile or bear market, a near-term investing strategy can help you capitalize on the downside and the opportunities that come with it, says Lane Mendelsohn, president of VantagePoint, which makes software that uses artificial intelligence technology to predict trends and movements in the market with up to 86 percent accuracy. "You have to readjust your approach a little," he says. Although there's a lot of information available for investors to use, Mendelsohn says that much of it is hard for humans to process, let alone understand what it will mean for the markets.
Near-term investors also have to act fast because the window of opportunity will be narrow. An investing trend could be as short as a few days, making it critically important to catch it before it comes. "If you look at what's happening today, it's too late," Mendelsohn says.
Other companies like Wall Street Horizon, which gives investors up-to-date information about earnings calendars, dividend dates, option expiration dates, splits and investor conferences, and Simpler Trading, which offers actionable trading advice, also provide tools to help investors make better near-term trade decisions.
But financial experts say that most investors shouldn't try to time or beat the market, and near term investing – which requires more active trading and a lot of research – should be left to the pros. "To build wealth, an investor should [forget] about the daily financial weather, like market news and headlines, and instead concentrate on growth of wealth over time," says Dejan Ilijevski, president of Sabela Capital Markets.
Also, a near-term strategy often requires more complex maneuvers – such as straddles, options, puts and calls – to execute trades successfully. A straddle, for example is when you buy a call and a put option for the same underlying stock, says James Schramm, a financial advisor with Schramm Financial Group in Valencia, California. A call option gives an investor the right to buy a security at a certain price during a specified period, and a put option works the same way for selling an investment.
Schramm uses a straddle when a company is about to issue its earnings report for the previous quarter. "If the stock generally moves a lot when earnings come out, a straddle can be used to earn profit no matter if the stock goes up or down," he says. "You don't make as much per trade, but it's a strategy to make more consistent gains."
If you're thinking about trying near-term investing, experts have the following advice.
Diversify your strategy. Near-term investing may not work the time, so don't rely it on it exclusively. "There is no reliable way to profit from known events consistently," says B. Scott Sadler, president and chief investment officer of Boardwalk Capital Management in Atlanta. "Sure, sometimes one can profit from recurring patterns, seasonality and the like, and sometimes other investors merely follow the price momentum or earlier trends." But "those are different issues ultimately driving investor returns – not something that an investor can count on to improve performance consistently." As a result, experts suggest adopting a near-term strategy only with certain industries or sectors while using a long-term strategy for the rest of your portfolio.