Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

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Messner8000
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Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Messner8000 » Sat Nov 17, 2018 2:36 pm

I’ve been through the seven layers of hell trying to settle upon an asset allocation. The problem is that if you looked up ‘paralysis by analysis’ in the dictionary, you’d find my picture.

I’m 36 with a mid-6 figure portfolio of various retirement accounts (401k, 403b, 457b, ROTH IRA). I’ve been going back and forth (and reading way too much) about an 80/20 (stock/bond) versus 100/0 (stock/bond) portfolio. I understand that there is no “right” answer and that this difference in allocation won’t make a huge difference financially (and certainly not enough to justify all my obsessing). I just want to make a decision so I can move on with my life and think about other things 😊

I feel confident (and for purposes of responding to my post please assume) that with either allocation I won’t sell in a market crash (I have a very stable job, all the money is in accounts I won’t be accessing for 20+ years, etc.). Following the oft-quoted mantra of don’t take on more risk than you need, but take on as much risk as you can handle (or something like that), I feel I could handle 100% stocks without losing any sleep.

But for some reason I just can’t pull the trigger on a 100% stocks portfolio. I can’t put my finger on it exactly. Some of it is market timing (“be nice to have some bonds if the long bull market ends”); some of it is fatalism (“if we hit a great depression, some diversification would be nice,”) and part of it is not knowing what I want out of life (e.g., “I like the idea of retiring at 50 or 55 if possible, and 80/20 seems like a good AA for someone 15-20 years from retirement).

So recently I came up with an idea (that I’m sure isn’t new) and hoped to get some feedback. Basically, my idea is to have an 80/20 (stock/bond) portfolio, and then put in my personal investment plan that if the market hits 21,000 (yes, an arbitrary number), I will shift my AA to 85% stocks/15% bonds, and then keep increasing my AA 1 percent into stocks for each 1000 point it drops.

My thinking is that:
• If the market just keeps rising for the foreseeable future, then my 80/20 portfolio will do well and I won’t worry about the icing on the cake that I lost by not going 100/0.
• If the market goes down significantly in the next 0-10 years, I will be in a good position to buy more stocks, and then I can just keep that higher allocation until life circumstances change.

Thoughts? Is this just a fancy (and ill-conceived) form of market timing? Do others have a plan like this--not just rebalancing if stocks go down, but making their AA more aggressive if stocks go down?

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by MotoTrojan » Sat Nov 17, 2018 2:38 pm

It’s called rebalancing, you naturally buy more stocks in a downturn.

After the crash you’ll be at 100/0; when do you go back to 80/20? Also why are you using a price weighted index of 30 companies. Use PE ratio or something more meaningful on a proper index like the S&P500.

Just stick to 80/20. Bonds have beaten stocks over several different decades.

I’m 100/0 for full disclosure.
Last edited by MotoTrojan on Sat Nov 17, 2018 2:40 pm, edited 1 time in total.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by vineviz » Sat Nov 17, 2018 2:39 pm

Yes, a complicated version of market timing.

You will do better by picking a stock allocation and sticking to it. Most people find it difficult enough to rebalance normally, without the added dangers of making tactical decisions.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by jvini » Sat Nov 17, 2018 3:08 pm

Hi. I hope this helps in some way. I will say generally that any plan to somehow outsmart the market or create some sort of complex system usually leaves you clever by half. Meaning it doesn't work, it's impossible to stick to, or you will drive yourself crazy. Based on your struggle to find an allocation that you're happy with, I think you will drive yourself crazy trying to stick to your plan; then at some point you will devise a new plan when things go all weird in the market, your life situation changes, or some other unforeseen event happens, good or not as good.

I once had a 100% stock portfolio. I had it for about 10 years and even continued through 2000. The thing is, I wasn't making as much money, putting away as much, and my portfolio was smaller but decent (mid six figures). I watched my money grow and wondered why anyone would invest in bonds when statistically their returns were lower long term, basically starting from 1929. What I didn't know was that 2008 would happen, and that there have been fairly long spans when bonds actually outperform stocks. I wasn't looking closely enough at the details or variables.

I did not panic. It was, however, an extremely stressful time for a number of reasons. I watched my portfolio almost half, I watched my kids' 529's go way down, and at the same time I was worried about work. Crashes bring about a lot of things you never thought might happen. So, I kept investing in my stocks (index funds) and eventually the market recovered and I was back up to where I was pre crash. When I reached that point, I sold a portion of my funds (in a tax advantage account so no capital gains) and created a more balanced portfolio. I bought a total bond market index fund (actually at that point I was dealing with ETFs, but similar enough).

I read more. looked at lots of stats, and devised a simple strategy and a set of rules that have served me very well and I believe will continue to serve me well into retirement. I'm 51 now and that could be 4 years or way more because I like what I do. It will be nice to have the option.

For me, age - 13 in bonds works well. I would suggest age-10 on the conservative side. Age - 20 on the most aggressive side. The remainder (100% of my equity portion) goes into 15% international, and 80% total market fund, and a 5%-6% tilt towards small caps (that's a whole other thread). I dollar cost average quite a bit every month thankfully, and rebalance once a year. I will likely never go more than 40% bonds, which based on my age, I'm about at.

Some caveats because I do have a little bit of a riskier bent. I only invest into equities and then rebalance at my designated time. I own 5 individual stocks that I've held for over a decade that I don't touch. They started at 2% of my portfolio and have grown to about 6%. They are my small caps that have done really well and I enjoy keeping tabs on them. Also, if stocks go up by 20% prior to my rebalancing date or go down 12-15%, I will rebalance into bonds or stocks accordingly.

Having a set of rules that I tailored to my investing style has been a huge help. I've been able to pay off my mortgage (also another topic that's debated around here) and have 7 figures put away for retirement. Hope this is all more helpful than confusing.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by nisiprius » Sat Nov 17, 2018 5:09 pm

As far as I'm concerned, the term "market timing" means--or ought to mean--the strategies followed by people who call themselves "market timers." There are a lot of them. They don't think they're foolish. "Market timing" consists of making large (often all-in to all-out or vice versa), sudden allocation moves, based on a systems derived from "technical analysis," that issues buy and sell "signals."

There are all kinds of systems that involve gentle, modulated, smooth modification of asset allocation based on some measure of valuation. Even rebalancing falls in this category. Whether they are good, bad, or indifferent, they are not "market timing" and I don't think it helps at all to call it "market timing."

(I don't do it, I am personally skeptical about it, and some of my skepticism is based on what is essentially the failure of "tactical asset allocation" mutual funds--very popular during the 1980s--which swing back and forth around a "neutral target mix," raising and lowering stock allocation gently based on valuations or other indicators. If professional mutual fund managers weren't able to make this work, it cannot be as easy as it looks.).
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by samsdad » Sat Nov 17, 2018 7:32 pm

Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
I’ve been through the seven layers of hell trying to settle upon an asset allocation. The problem is that if you looked up ‘paralysis by analysis’ in the dictionary, you’d find my picture.
Let's be real. There's nine circles of hell. https://en.wikipedia.org/wiki/Inferno_(Dante) And no, you can't 80/20 them with a little slice of heaven to lower the risk. Wait till you get to the circle that involves deciding your international allocation. :shock:

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by alex_686 » Sat Nov 17, 2018 7:37 pm

MotoTrojan wrote:
Sat Nov 17, 2018 2:38 pm
It’s called rebalancing, you naturally buy more stocks in a downturn.
Nope, it is market timing. He is changing his AA in response to what the market is doing. It is rebalancing if you are working of the internital dynamics of your AA.

I can make numerous justifications for rebalancing. I can't for something like this.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by arcticpineapplecorp. » Sat Nov 17, 2018 8:10 pm

You post is very interesting to me. It reflects the internal struggle that many people have with many things.
Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
I just want to make a decision so I can move on with my life and think about other things 😊
how does this jive with what you're planning on doing with your "not so new" strategy? That is to say, do you really want to get on with other things or do you want to watch the market constantly to tell you how to market time rebalance?
Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
I feel confident (and for purposes of responding to my post please assume) that with either allocation I won’t sell in a market crash (I have a very stable job, all the money is in accounts I won’t be accessing for 20+ years, etc.). Following the oft-quoted mantra of don’t take on more risk than you need, but take on as much risk as you can handle (or something like that), I feel I could handle 100% stocks without losing any sleep.
that's good. but have you? Have you been through a market that crashes 50% and unemployment rises to 10%? If not, it's easy to say what you would do, but only when you've been through it do you know what you would do.
Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
But for some reason I just can’t pull the trigger on a 100% stocks portfolio. I can’t put my finger on it exactly.
Then don't. I often say that feelings don't really help you as an investor (meaning, they won't help you improve returns) but they can hurt you. However, this niggling feeling you're getting is something saying, "that's too much risk" or "I think I can do this, but I'm not 100% sure. (see what I did there? made a joke about 100% :wink: ) So I'd say follow that feeling. Becuase that's the one inside that's trying to protect you. It's your intuition not about danger, but about how risk averse you really are (it may be less than you think it is, or less than you've convinced yourself it is).
Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
So recently I came up with an idea (that I’m sure isn’t new) and hoped to get some feedback.
It's probably not new (and it is arbitrary). I'd say most if not all things have been tried and likely failed. Anything that looks new is probably a variety of the old. The thing that's funny is that the idea that works is the one people seem to have the hardest time following. It's called staying the course.

My final thought is that you and many people try to get the optimal portfolio and isn't it true that there isn't one? I don't just mean it's hard to know before the fact, something like bonds outperformed stocks over 30 years (1980-2009) (or did as well with far less risk which was a 30 year free lunch), but rather won't your portfolio change through the years? Even if you decide 100% stock is the right move (and I'm not saying it isn't), isn't that just, for right now? Do you really think you'd be 100% stock for the rest of your life? Of course not. You'd want to have safer assets as well, especially in retirement. So even if you're 100% or 80/20 now, you will find in 10 years you might start dialing it down a bit. And then a bit more. And so on. Kinda like what a target date retirement fund does (see what I did there? I was subtly making a suggestion to choose a fund that allows you to set it and forget it :wink: ).

So stop thinking or worrying about the right allocation. There is no right allocation for all times. There's just the right allocation for right now. Your life, your needs, etc. will change. And you should maintain the flexibility to change it over time. Say you hit your number at an earlier age than you expected because of taking greater risk and greater than expected returns. You might find yourself saying "I can dial this down sooner because I've won the game". Be flexible. But don't try to invent or reinvent cute types of strategies that will only keep your eyeballs glued to cnbc, especially when you said you want to "move on with your life and think about other things". Is that what you really want to do?

Good luck whatever you decide.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by White Coat Investor » Sat Nov 17, 2018 8:28 pm

No, but make it automatic and systematic. Don't let emotion get in there.
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Messner8000 » Sat Nov 17, 2018 9:00 pm

Thanks for taking the time to write such thoughtful responses. Definitely have provided some food for thought (and good to remember there are 9 layers of hell, not 7).

I just wanted to say that I completely understand and agree that my idea to shift my AA toward stocks in a downtown, whether we call that market timing or not, is not some magic/brilliant solution intended to beat the market or anything like that. It's not intended to be.

For me, the value of the plan would be the hope that it would appease the two voices in my head —the one who wants an aggressive (100/0) portfolio, and the one who wants a more conservative (80/20) portfolio. The idea is that I can appease the conservative demon by being at 80/20, and I can appease the aggressive demon by telling him that if the market goes south in a big way, I promise myself I will increase my stock position (both by rebalancing and by increasing my AA toward stocks). I just want the demons to call a truce, but I don't want the armistice to be a terrible investment plan.

A couple more thoughts as to other responses:
- I agree it needs to be systematic and automatic. I suspect everyone says this when the market is doing well, but I do feel strongly that if I put this plan in my Investment Policy Statement, I will stick to it.
- Since I would only change my AA in response to very significant market shifts, I would have no need to track the markets daily/weekly/monthly (a big plus in my book). If the market is dropping thousands of points, I suspect I'll know :)
Last edited by Messner8000 on Sat Nov 17, 2018 9:02 pm, edited 1 time in total.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by MotoTrojan » Sat Nov 17, 2018 9:01 pm

alex_686 wrote:
Sat Nov 17, 2018 7:37 pm
MotoTrojan wrote:
Sat Nov 17, 2018 2:38 pm
It’s called rebalancing, you naturally buy more stocks in a downturn.
Nope, it is market timing. He is changing his AA in response to what the market is doing. It is rebalancing if you are working of the internital dynamics of your AA.

I can make numerous justifications for rebalancing. I can't for something like this.
Apologies if my phrasing wasn’t clear, I see how it logically reads as you interpreted. I meant rebalancing is this magical system the OP is looking for which will allow owning more shares (not %) of equities when they go down.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Messner8000 » Sat Nov 17, 2018 9:07 pm

I would own more shares and a higher percentage (I think). The idea is that if I was 80% in stocks and 20% in bonds, and the market declined such that I would be 70% stocks and 30% bonds (for example), when I rebalanced, I would rebalance to 85% stocks and 15% bonds (not 80/20).

For the record, just writing that out (for the first time) makes me feel like it was an idea conceived by a third grader. Perhaps that should give me a hint that it's not a great idea?!

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by arcticpineapplecorp. » Sat Nov 17, 2018 10:47 pm

Messner8000 wrote:
Sat Nov 17, 2018 9:00 pm
For me, the value of the plan would be the hope that it would appease the two voices in my head —the one who wants an aggressive (100/0) portfolio, and the one who wants a more conservative (80/20) portfolio.
While it may be true that 80/20 is a "more conservative portfolio" than 100% stock, I'd never refer to it as "conservative". I'd rather you think (and talk or write) in terms of 100% stock being "fully agressive" and 80/20 as "aggressive". I think that's also more of the industry terminology. I think it would help you see that there's nothing conservative about it. It's risky, just slightly less risky than 100% stock. From there the industry usually says 70/30 is moderately agressive, 60/40 to 40/60 balanced, 30/70 to 100% bond as conservative.

Take a look at the losses that occurred during the 73-74 bear market (figures from Larry Swedroe):

Image

While the 100% srock portfolio lost 50% the 80% stock portfolio still lost 35%. Lost a third of your money instead of half. Will that make you feel better?

Now what's conservative? 30/70 or lower. What were those losses? 10% or less. Now that's conservative.
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by BolderBoy » Sat Nov 17, 2018 10:53 pm

Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
Thoughts? Is this just a fancy (and ill-conceived) form of market timing? Do others have a plan like this--not just rebalancing if stocks go down, but making their AA more aggressive if stocks go down?
That would be a form of market timing.

If you are buying/selling (exchanging, really) in order to maintain the AA that you've settled on, that is rebalancing.
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by aristotelian » Sun Nov 18, 2018 3:03 am

That sounds like the very definition of market timing. It may or may not work, but it is market timing in that you have to know when the bottom is reached to buy back in, plus you need to know when to sell again after the market has peaked. You risk further losses on the way down and missing gains on the way up.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by harvestbook » Sun Nov 18, 2018 8:36 am

Why not just go 90/10 and split the difference?

I had very few bonds until I started hanging out here, then I added a chunk in what turned out to be a relatively bad time (when interest rates were at the lows). I was kind of spooked into it by people with a more conservative bent, but I also acknowledged their long investing experience. Lately I've been glad I have them, even though I went through the 2008 crash just fine with total ignorance of what my 401k actually held.

I've established glide paths to go to 80/20 and then 60/40 as I near retirement. I don't want to spend any time second-guessing or moving around a lot of pieces based on what other investors and the market are doing.
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Atgard » Sun Nov 18, 2018 9:28 am

I have seen several times that 80/20 generally (historically) captures almost all the returns of 100% stocks, with significantly less downside. It seems to be the "sweet spot" in an aggressive portfolio, with severely diminishing returns beyond that point (since you lose the benefit of diversification).

(Same seems to hold true on the other side, so the range of allocations I consider fall between 80/20 and 20/80.)

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by goingup » Sun Nov 18, 2018 9:48 am

Messner8000 wrote:
Sat Nov 17, 2018 9:07 pm
I would own more shares and a higher percentage (I think). The idea is that if I was 80% in stocks and 20% in bonds, and the market declined such that I would be 70% stocks and 30% bonds (for example), when I rebalanced, I would rebalance to 85% stocks and 15% bonds (not 80/20).

For the record, just writing that out (for the first time) makes me feel like it was an idea conceived by a third grader. Perhaps that should give me a hint that it's not a great idea?!
I don't think it's a particularly bad or good idea. It's an idea that is tough to execute as the market doesn't move uniformly. It may swoon and climb and dive again. You'll have to decide when to execute and by how much. You may find yourself paralyzed by indecision and doubt as the market posts lower lows.

The main thing to do is keep saving, keep contributing, stay invested and don't panic. If you think you can handle some bold moves beyond that, then go forth bravely! :beer

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by lostdog » Sun Nov 18, 2018 9:51 am

Maybe go with 90/10 middle ground.
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Danielle896 » Sun Nov 18, 2018 10:35 am

I have to admit I have a little trouble re-balancing myself. If I was to re-balance to my original allocation, I would be putting more in emerging markets and REITs.

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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by hdas » Sun Nov 18, 2018 11:04 am

Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
My thinking is that:
• If the market just keeps rising for the foreseeable future, then my 80/20 portfolio will do well and I won’t worry about the icing on the cake that I lost by not going 100/0.
• If the market goes down significantly in the next 0-10 years, I will be in a good position to buy more stocks, and then I can just keep that higher allocation until life circumstances change.

Thoughts? Is this just a fancy (and ill-conceived) form of market timing? Do others have a plan like this--not just rebalancing if stocks go down, but making their AA more aggressive if stocks go down?
Three things:

1. Beat the lethargy #1 - Download some data and test for yourself....if you cant.
2. Beat the lethargy #2 - Look up the myriad research papers written about this subject....if you cant
3. You'll find that the answer is: it depends of the prices path forward vis a vis your investment horizon and FOR YOU it doesnt matter the theoretical optimal.

While we are it, I believe in the coming years there will be more developings (improvement) in the theoretical underpinnings of portfolio theory, perhaps one that incorporates drawdown in the framework such as this one
A General Framework for Portfolio Theory. Part I: theory and various models
Stanislaus Maier-Paape, Qiji Jim Zhu

Utility and risk are two often competing measurements on the investment success. We show that efficient trade-off between these two measurements for investment portfolios happens, in general, on a convex curve in the two dimensional space of utility and risk. This is a rather general pattern. The modern portfolio theory of Markowitz [H. Markowitz, Portfolio Selection, 1959] and its natural generalization, the capital market pricing model, [W. F. Sharpe, Mutual fund performance , 1966] are special cases of our general framework when the risk measure is taken to be the standard deviation and the utility function is the identity mapping. Using our general framework, we also recover the results in [R. T. Rockafellar, S. Uryasev and M. Zabarankin, Master funds in portfolio analysis with general deviation measures, 2006] that extends the capital market pricing model to allow for the use of more general deviation measures. This generalized capital asset pricing model also applies to e.g. when an approximation of the maximum drawdown is considered as a risk measure. Furthermore, the consideration of a general utility function allows to go beyond the "additive" performance measure to a "multiplicative" one of cumulative returns by using the log utility. As a result, the growth optimal portfolio theory [J. Lintner, The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, 1965] and the leverage space portfolio theory [R. Vince, The Leverage Space Trading Model, 2009] can also be understood under our general framework. Thus, this general framework allows a unification of several important existing portfolio theories and goes much beyond.
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by frankmorris » Sun Nov 18, 2018 11:53 am

I've been thinking a lot about this as well recently, and here's my take from a non-professional/non-expert perspective:

"Market timing" has come to take on different meanings and different connotations, and has such - to some degree - outlived its usefulness in terms of categorically avoiding something simply because it has that label. Much better would be to understand the principles/forces that are present in market timing and, assuming you're against them, avoid them.

Whether or not "rebalancing" falls within the category of "market timing" depends on connotation. Rebalancing is, by definition, a rules-based system of shifting assets based on current valuation/cost of different assets in your portfolio. If the market for Asset 1 goes up proportional to the AA, you sell and buy the asset(s) with lower AA. Unequivocally, the trigger for this buy/sell behavior is valuation. Yet we don't consider that "market timing" generally because there are pre-determined rules for what will be bought under what conditions, with a fixed allocation goal both before and after. However, the problem with market-timing is that one is attempting to predict future returns based a newly arrived market valuation level. It's speculative by nature, and those against market-timing are against speculation (beyond the speculation that over the long-term the market will generally go up).

With your plan, you aren't speculating - you are simply using rules-based triggers to shift from one asset allocation to another. You are fine with the AA if it doesn't shift, and fine if it does - same as people who are fine if their portfolio shifts and needs to be rebalanced. You aren't making an emotional or speculative decision about the future of the market. You aren't trying to call top or bottom. You aren't boxing yourself into a bad initial AA on the hopes that the right one comes along.

Further, the idea that you have a shifting AA makes perfect sense, and is routinely practiced by Bogleheads who age and adjust their AA accordingly. In their case, they're using some artificial number (age) which has only a minor correlation with exact life expectancy. They just realize that, on average, a more conservative AA is better over time, so they use artificial rules (e.g., Age -10 in bonds) as a "best guess." It's still a risk, it's just an averaged-out one. In your case, you're wanting to shift to a more aggressive portfolio over time, and have established a priori rules as to if/when you will shift your allocation, down to the S&P point (or whatever you're using).

Sure, I think people here could make a case that you're engaged in "market timing," but who cares about a definition. If you've looked what the actual problems are with market-time, I think in your case you're largely avoiding them. And, even if you could still be found guilty of market timing,, you know exactly what you're getting into. You know exactly that the end result will be within a range of acceptability. There is no risk to you that your decision framework will lead you of course. Of course, that's provided that you have the resolve to not sell in a panic, etc., but that risk is present with all investors.

I say go for it. It makes sense. It hedges your bets, and while you'll never get a green light from the most conservative on this forum, you know what you're getting into. The only drawback would be if you really, deep down, do want to be in 100% stocks and you're just using this strategy as a means of attempting to capture some alpha while trying to convince yourself you're just using a shifting AA strategy. Let's say the market goes up 35% from here, then crashes 20% next year, never to again be as cheap as it is now for the next 50 years. Will you really be okay with permanently maintaining that 80/20 AA of your original capital? If so, you're golden. If you think in 10 years you might say, darn - I tried - but I'm all in - then you're engaged in a bit of market timing. It's your money, and the risk probably isn't that great, but that's a different beast.

MotoTrojan
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by MotoTrojan » Sun Nov 18, 2018 2:07 pm

frankmorris wrote:
Sun Nov 18, 2018 11:53 am
I've been thinking a lot about this as well recently, and here's my take from a non-professional/non-expert perspective:

"Market timing" has come to take on different meanings and different connotations, and has such - to some degree - outlived its usefulness in terms of categorically avoiding something simply because it has that label. Much better would be to understand the principles/forces that are present in market timing and, assuming you're against them, avoid them.

Whether or not "rebalancing" falls within the category of "market timing" depends on connotation. Rebalancing is, by definition, a rules-based system of shifting assets based on current valuation/cost of different assets in your portfolio. If the market for Asset 1 goes up proportional to the AA, you sell and buy the asset(s) with lower AA. Unequivocally, the trigger for this buy/sell behavior is valuation. Yet we don't consider that "market timing" generally because there are pre-determined rules for what will be bought under what conditions, with a fixed allocation goal both before and after. However, the problem with market-timing is that one is attempting to predict future returns based a newly arrived market valuation level. It's speculative by nature, and those against market-timing are against speculation (beyond the speculation that over the long-term the market will generally go up).

With your plan, you aren't speculating - you are simply using rules-based triggers to shift from one asset allocation to another. You are fine with the AA if it doesn't shift, and fine if it does - same as people who are fine if their portfolio shifts and needs to be rebalanced. You aren't making an emotional or speculative decision about the future of the market. You aren't trying to call top or bottom. You aren't boxing yourself into a bad initial AA on the hopes that the right one comes along.

Further, the idea that you have a shifting AA makes perfect sense, and is routinely practiced by Bogleheads who age and adjust their AA accordingly. In their case, they're using some artificial number (age) which has only a minor correlation with exact life expectancy. They just realize that, on average, a more conservative AA is better over time, so they use artificial rules (e.g., Age -10 in bonds) as a "best guess." It's still a risk, it's just an averaged-out one. In your case, you're wanting to shift to a more aggressive portfolio over time, and have established a priori rules as to if/when you will shift your allocation, down to the S&P point (or whatever you're using).

Sure, I think people here could make a case that you're engaged in "market timing," but who cares about a definition. If you've looked what the actual problems are with market-time, I think in your case you're largely avoiding them. And, even if you could still be found guilty of market timing,, you know exactly what you're getting into. You know exactly that the end result will be within a range of acceptability. There is no risk to you that your decision framework will lead you of course. Of course, that's provided that you have the resolve to not sell in a panic, etc., but that risk is present with all investors.

I say go for it. It makes sense. It hedges your bets, and while you'll never get a green light from the most conservative on this forum, you know what you're getting into. The only drawback would be if you really, deep down, do want to be in 100% stocks and you're just using this strategy as a means of attempting to capture some alpha while trying to convince yourself you're just using a shifting AA strategy. Let's say the market goes up 35% from here, then crashes 20% next year, never to again be as cheap as it is now for the next 50 years. Will you really be okay with permanently maintaining that 80/20 AA of your original capital? If so, you're golden. If you think in 10 years you might say, darn - I tried - but I'm all in - then you're engaged in a bit of market timing. It's your money, and the risk probably isn't that great, but that's a different beast.
Just curious what the OPs "plan" will call out for once going to 100/0. How/when do they trim back?

Fallible
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Fallible » Sun Nov 18, 2018 2:55 pm

arcticpineapplecorp. wrote:
Sat Nov 17, 2018 8:10 pm
...
Messner8000 wrote:
Sat Nov 17, 2018 2:36 pm
But for some reason I just can’t pull the trigger on a 100% stocks portfolio. I can’t put my finger on it exactly.
Then don't. I often say that feelings don't really help you as an investor (meaning, they won't help you improve returns) but they can hurt you. However, this niggling feeling you're getting is something saying, "that's too much risk" or "I think I can do this, but I'm not 100% sure. (see what I did there? made a joke about 100% :wink: ) So I'd say follow that feeling. Becuase that's the one inside that's trying to protect you. It's your intuition not about danger, but about how risk averse you really are (it may be less than you think it is, or less than you've convinced yourself it is).
...
Yes, and those "feelings" the OP "can't put his finger on exactly" have a well-known name in investing: emotional risk tolerance. Understanding one's individual tolerance for risk is a basis for determining how to set an allocation that is right for one's unique needs and, in turn, it's based on knowing oneself.

Fairly often on the forum there are examples similar to the OP's where the topic line mentions market timing but is really about risk tolerance and the failure to recognize, understand, or follow it. An example is when an OP, usually misunderstanding volatility or outright fearing a bear market, thinks it is market timing to change an allocation; but it really is a belated attempt to bring the allocation more in line with his/her risk tolerance, a tolerance that was not taken into account before, or one that has changed (which tolerance often does).

OP, a good book on AA and risk tolerance is Rick Ferri's All About Asset Allocation, 2nd ed. Another is Jason Zweig's Your Money & Your Brain. And there is more on the wiki's "Asset allocation" and "Risk tolerance" pages.
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

Topic Author
Messner8000
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Re: Is it 'Market Timing' (i.e., Bad) to Have an Investment Plan Where You Increase Stock Allocation if Market Declines?

Post by Messner8000 » Sun Nov 18, 2018 7:24 pm

Thank you everyone for your thoughtful responses. This forum is really great.

The posts have made me think about a few issues I hadn't previously considered (e.g., once I increase my AA would I ever decrease it; how would I time my buy-orders given how much the market can fluctuate in a day, etc.). It also has made me think a lot more about the value of simplicity. About the value of avoiding a bunch of complex if/then commandments, even if they are self-imposed and I stick to them.

Thus, I think I am going to just settle on an 85/15 stock/bond portfolio. Obviously this is really not different at all from an 80/20 portfolio, but I think it is the right balance for me. If I was willing to go to 85/15 if the market tanked tomorrow, then I think it makes sense to just start 85/15 today, and focus on savings, and not having to follow a set of self-imposed rules.

I'll sleep on it. But I think I am finally comfortable with this choice.

Thanks, as always, for the thoughts.

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