Okay, nobody ever emails me this exact question. Instead, they email me or post in a comment or on an internet forum a version of it such as:
With the market so high right now would the best way to do this to be move the money to Vanguard and put it in a money market until the market corrects or comes down some? I know that is guessing but it seems unlikely to stay this high.
or
Since interest rates have nowhere to go but up, should I put my safe money in cash or short term bonds instead of the intermediate term bonds I have it in now?
or
I bought Apple stock at $479/share. Should I sell?
or
Several times over the years I have felt very uneasy about the rapid rise of the market. EACH time was followed (within 1-8 months) by a significant drop in market value and my holdings took a nose dive. Each and every one of those times, I was in a ‘managed' account (more like damaged account) where the manager talked me out of pulling my chips off of the table. Had I done so, and held onto cash for the following 9-12 months before reinvesting into the same equity mix, I'd be way ahead of where I currently am, even if I hadn't completely sidestepped a down market. I'm getting that feeling again….
But the reality is that it is all the same question — should I try to time the market? It seems so easy to do, and it's easy to calculate how much better off you would be if you could do so. But before you spend too much time thinking about it, think about what some very smart people have said about it:
Famous, Smart People Who Say You Shouldn't Try To Time The Market
“I do not know of anybody who has done it (market timing) successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently.” — Jack Bogle
“Any investment method that relies on predicting the future is doomed to fail.” — Chandan & Sengupta
“It must be apparent to intelligent investors–if anyone possessed the ability to do so (market time) he would become a billionaire quickly.” –David Babson
“Only liars manage to always be “out” during bad times and “in' during good times. –Bernard Baruch
“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market.” —Benjamin Graham
Calculating the Enormity of the Task
Remember that when you time the market (whether stocks, bonds, real estate or whatever), you have to do more than just one thing right.
- You have to decide what's going to happen.
- You have to decide when to get out.
- You have to decide when to get back in.
Miss any of these three things and you may have been better off not trying in the first place.
Market-timers like to point out that you don't have to call the very bottom or the very top of the market to add some additional return to your portfolio. This is true, but there does have to be a big enough difference between when you get out and when you get back in to more than makeup for the taxes and investment expenses associated with both trips.
You should probably also add in a certain expense of your time and effort spent trying to discover when you should get in, as well as out.
A “know-nothing” buy-and-hold investor doesn't have to spend much effort at all on portfolio management. If her asset allocation gets out of whack a bit, she just rebalances back to the set percentages in her (hopefully written) investment plan. There is a great deal of liberation in having an investment plan that doesn't require you to predict the future. Not to mention it keeps expenses and taxes quite low.
Keep a Log of Your Market Predictions
Still not convinced? Then I suggest you try an experiment, but let's do it with paper money instead of actual money.
Start writing down your predictions. Do it right now. Will the stock market finish higher or lower at the end of the year than it is right now? How about in 90 days? What will happen with real estate in your neighborhood over the next 5 years? Where will interest rates be in 90 days, 180 days, or a year from now? What about the value of a share of Apple in 6 months? Then keep track.
If you're like most of us, and you're completely honest with yourself, it won't take you long to realize you have no idea what the future holds. Even if you find out you're right about some things, you'll realize it probably had more to do with luck than any skill or superior knowledge. Larry Swedroe likes to keep track of the “sure things” that don't come to pass each year.
For example, in his 2012 “Sure Things” edition, he discusses how European stocks actually outperformed US stocks for 2012 and how investors who stayed in long-term bonds funds dramatically outperformed those who went short in order to be ready for the “sure-thing” of rising interest rates. (It's been a “sure-thing” for 3-4 years as near as I can tell.)
A Few Extremes
Now, all that said, there may be a few times in life where markets are so out of whack that it seems an awfully good bet to try to time the market. I was quite conscious when buying a house in 2006 that there was a very good chance the value of that house would go down in the future. I made sure I bought the house at a decent price for the time and also that it wasn't very expensive, in case it's value did drop significantly to protect myself. Then the price went up for the next two years and then eventually fell to around the same value I bought it at.
In 2010, when I bought my current house, I knew it was a pretty good time. The value of houses in the neighborhood had dropped 20% or so from the peak, and interest rates were at a low not seen in decades. Over 2 years later the house appraised for about the same price as it did then and interest rates went even lower. Now 9 years later it has certainly appreciated, but it really taught the lesson that time in the market matters more than timing the market.
Near the end of 2008, as the stock market started rebounding from its October and November lows, I thought, “Well this is probably a good time to buy stocks and the market is now on its way back up.” Then those stocks lost 27% more of their value between December and March. In fact, far more than 50% of the time when I've tried to time the market, (thankfully usually just a little,) I've been wrong.
What To Do
Write down an investment plan — 25% in US stocks, 25% in international stocks, 30% in bonds, 10% in real estate, 10% in gold or whatever strikes your fancy as a solid long-term plan. Keep your costs low. Rebalance once a year. Then quit listening to or watching “financial porn.” I can't time the market and neither can you. Get used to it.
What do you think? Can the market be successfully timed? Why or why not? Comment below!
timing the market is hard. Because not only do you have to choose your exit correctly, but also your re-entry correctly.
one of the main mistakes people make though is that they figure there’s only one way to time… All in, or all out.
I think that there can be some merit to scaling or rebalancing to assist with your returns though.
When the dow hit 14K it also aligned with the approximate time that i look to rebalance.
My stock portfolio had done well, and my bonds less well… so I trimmed my stocks some and added to my bonds some… was this timing? not really….
but do i feel good that i did harvest some profits and took about 8-10% off the table at these highs? absolutely.
If the market goes to 15K, obviously i will have missed a little money.. but if it does hit that correction at some point down to 13 or 12k… well, i’ll be able to “re-balance” again.
I agree with z. When times appear to be good and getting better, people get greedy when they really should be harvesting a little bit at a time. When times are bad, well…I just close my eyes and hold on for dear life.
I don’t think mindless rebalancing back to portfolio guidelines should be equated with changing your asset allocation based on what you think will happen in the future.
I time the market but not it the ways indicated here. First I have a plan which is not typical. A large portion of my investments are designed to produce income. Dividends, some bonds, REITs etc. The rest is to grow and since I invest mostly in individual stocks (another anomily) I have a list of stocks that I follow or if some negative news causes an emotional reaction then I buy. My take is that the price that you pay is the most important factor, but that is because I am wealthy enough and just want to have income and not lose money in total. Those who buy after the market has made a large run up and sell when it is down lose. This method is not for everyone and I admit that the standard method is good for most.
mr bogle is great but his comments are ridiculous. he knows soros, buffet, jim rodges and, for that matter who bernard baruch is. the decision moose website, bill o’neil, the guys in 2 books full of “market wizards”—could go on and on–YES, YES, YES the market CAN be timed. (perhaps not well, by most)
maybe a reasonable answer to “should i try to time the market?” might be “if you want to and are happier assuming that risk/reward instead of the risk/reward of buy/hold/rebalance or bury it in the backyard–2 approaches that also carry risk.”
It is interesting that most of the comments so far seem more on the “yes, you can” side of the argument.
With the continued growth of index investing I think most serious investors are saying “no we can’t.”
I may be somewhere in the middle. I can’t time the market or a stock. But I see cycles generally. I remember arguing with colleagues about leveraged stock investing in 2000. I thought the market was over-valued.
My thinking is closer to that of Ben Graham who allowed us to slide down some risk in frothy markets and increase stocks when you feel the market is offering values. He recommended a default of 50:50 stocks to bonds and never having more than 75% of either. It is hard to go broke doing that.
Lastly, most doctors can’t successfully time the market or pick individual stocks. Sometimes I can’t resist trying. I just limit it to 5% or less of my portfolio to get the urge out of my system.
I see cycles too….retrospectively.
You can do whatever you want with 5% though and should still be okay.
This is a very timely article. I had a client tell me he wanted to complete the second half of the tax loss harvesting yesterday, instead of Friday. That is, sell on Friday, and buy on Monday. I asked why. I explained that theoretically it is best to do it in real time. He “had a feeling” the market was going to go down further yesterday. Well, that feeling cost the client thousands of dollars as the market yesterday went up over 5 percent! Did you post this article on purpose with these market fluctuations, or was it scheduled to be posted anyway?
I think Jill moved it up. She handles the Tuesday (and Wednesday and Saturday) posts.
Why did not you hold his hands? Supposedly, this is what you got paid to do.
Sounds like he couldn’t talk him out of it to me. At the end of the day, the client should be able to make their own decisions, no?
Not surprising to see that some docs think they can time the mkts and as well foolishly invest in individual stocks
guess they haven’t read that much on the subject
Anyone who could time the market consistently would be a fool to go on any public forum on the internet and spout off about it. If someone has that kind of unique advantage, the worst thing he can do is tell other people about it.
I’m seeing this more frequently in the last week on Bogleheads where all of a sudden a new Nostradamus shows up every few hours; yet even with their alleged market timing abilities, they inexplicably still have day jobs.
I figured this would be a short post:
“No”
I agree with #7. As spouse (and TV and radio) were exclaiming over the drop in the stock market, and spouse urged me to buy now if we could afford it, I put another little bit into 2 US stock index funds we own. I felt justified in my timing seeing that their price had dropped 3-5%.
Then over the weekend I realised it was time on my calendar to shift some TSP money from G (govt bonds) to C (US stocks) as part of our longer term plan. I figured ‘let me do it now, and 4.5% not just 3.5% of it to catch this dip in the market!’ After having done so I researched a few more minutes and see that even at the lower price last week I was still paying more for those C shares than a year ago. And of course while I apparently caught the small dip in my first venture, I think the TSP transaction took place yesterday and did us less good than it might have on Friday.
So I figure in 2 moves this week I proved that I should buy into the market any time it’s appropriate to buy (and not wait!), and that last year (and often enough last week) is likely to be better than today in any case. Not fully convinced- I’m “dollar cost average” turning all the TSP G into TSP C- doing some every few weeks in case elections or covid or anything makes the market on any given day the highest for a year or several months. (Although it’ll almost certainly be much lower than when we sell.)
I think overall you are all correct, however, it’s not black and white. You don’t need to get in and out exactly at the top and bottom to benefit, nor do you need to be clairvoyant : that’s only for the super greedy. I was 60/40 stocks/bonds and realized that I had more than 10 years of expenses in bonds available. When the “crash” of Xmas 2018 took place I sold 50 K bonds and bought stocks after the market dropped 10%. Repeated with the next 10% drop. Did I capture all potential gains – no. But I did quite well. Last week, did the exact same thing with another 50 K. Market went up by 5% yesterday so the fun is over for a while ! Note that the market drops in each case was not due to an inherent “problem” with the market. The first was a silly response to the Feds statement about interest rates, and the current decline is due to the corona virus, which is likely going to be a short term issue. Markets “always” go up over time – you just need to be covered for the possibility that it takes awhile – hence 7-10 years of fixed income. If the market crashes and burns your portfolio will be meaningless anyway !
Did this perform better than just having invested all that money into the stock market to begin with, rather than in bonds?
One overlooked form of market timing is the “dry powder” phenomenon I see every once in a while from others on this site and Bogleheads… People hoarding lots of cash to “buy on down days” when “stock are on sale.” I supposed the “on sale” sentiment might be tongue in cheek and serve a reminder to stay the course, but I think many actually believe it and thereby try to time the market.
I agree. Not staying fully invested is market timing.
Would be interested in seeing the number of people who, as a counter to the financial soothsayers, would admit they market timed and lost money. After years of study and continuous weeks poring over the books and figures of a company a la Benjamin Graham, I *might* be able to astutely pick a few stocks, but I feel the return on my investment would be better spent picking up a few shifts at the hospital or buying a rental house or two and then having a beer.
1) sold bonds so was NEVER not fully invested’
2) the only way I will have lost money is if the market NEVER hits a new high again
3) zero time wasted – all stocks purchased were just added to previously held index funds
In an accumulation phase, if you’re going to add a certain amount per month to a total market fund, and you see the market drop a little more than usual, I see no problem in adding a little more than month and adding less the next month. Whether that accumulates to anything is probably nothing over a 40 year time frame.
The question is where the money comes from and why it wasn’t invested in the first place. If it wasn’t invested because it is in your emergency fund, then should it really be invested now?
JUST REBALANCE yearly
I cashed everything out. Bought some puts. I’ll wait until the markets get to 10K before wading back in.
What will you do if the markets never get to 10K? Remain in cash the rest of your days? What does your written plan say you will do in that situation?
While I agree with the post, I do think there are probably some shades of grey here. For example, as others have alluded to, is there that much of a difference between market timing and timely reallocation of funds, such as moving 5-10% of bonds into stocks when there is a market correction (like this past week), and then slowly building that bond % back up to desired asset allocation over coming months? Or, as of late 2019/early 2020, when the P/E ratio of the S&P is at historic highs, shifting more of investments into fixed income or real estate rather than stocks? Is this considered market timing or just making strategic adjustments to investments over time (while staying within overall plan)?
It’s just a matter of degree really.
I have timed the market many times successfully.
But there are also times the timing is off. That is the part most people leave out. And it is these times that revert everything back to the mean.
There have been times where my timing is almost perfect for years, but then in one year where I might think the market is going down for whatever reason and I am mostly in cash, the stocks shoot up even higher for 2 years and I missed out on all those gains. Those missed gains negate any additional return timing would have given and just leads to frustration.
People think timing is a silver bullet. Its just trading one risk factor for another. Obviously nobody wants to be in the market when it crashes, but what causes more stress too is bouncing in and out of the market and missing out on huge trends or getting whipsawed back and forth. Those little losses add up and many times end up being more than if you were just in the market for a big drop.
All the preparation to avoid losses in a crash lead to more losses than just being in the market with a lot more stress!
Timing the market for the most part does not increase return anyway, its just a way to decrease risk. Timing strategies typically give the same exact return as buy and hold but maybe a little less drawdown. Maybe 25% less drawdown at the most. Not that great of a trade off.
People never heed the advice that they can’t time the market because everyone thinks they are smarter than the person that tried and they will be more successful. The problem is that you are trying to make something out of timing that it was never designed to do. It doesn’t dramatically increase returns. You just trade one risk factor for another. Also it causes a lot of emotional burnout when as part of any timing method it doesn’t work everytime. And there may be times like the last 10 years where you are timing over and over and its wrong for years. Eventually most people give up and they are left with nothing but a loss. “You can’t give me gravy and tell me it’s jelly, because gravy ain’t sweet!” (Jo Bennett the Office)