Stay the course and market timing mix strategy

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Streptococcus
Posts: 307
Joined: Thu Jan 03, 2013 12:17 am

Stay the course and market timing mix strategy

Post by Streptococcus » Sat Apr 27, 2013 6:06 pm

1. Let's say I Invest in a 3 fund lazy portfolio (total stock market, total bond and total international);
2. AA is 75/25 with 35% international allocation
3. Over the years, I invest a fixed sum, say $2K/month, no matter what (during bulls, bears, booms, recessions, depressions). So i stay the course.
4. But I add the following market "timing" strategy: during the bears, recessions, depressions, When pessimism is the sentiment of the land and stocks are cheap, I have the fortitude to religiously increase my monthly investment by 50% ($3K/month) over the many years of downs.
5. Then, when the market recovers, I go back to my baseline monthly investment (2k/month)

Now I do not know any study that would support such strategy but I am inclined to think that it might pay off big dividends.
I know that this is very risky. In fact William Bernstein, in the investors manifesto, eloquently gives the example of Japan, which has been in a recession for more than 20 years and those who rebalanced their portfolios selling good US stocks for cheap japanese ones have been deeply disappointed. He also warns that no country, the US included, is immune from a financial armageddon. For Bill Bernstein, it is not impossible for wall street to close forever due to the worst happening. So the strategy of overinvesting in cheap stocks is risky, but so is our " stay the course" and "rebalancing" philosophy. And in case of Armageddon, no one will be safe anyway.
I would like our seasoned investors to educate me; why would such a market timing not be productive?
Strep

User avatar
bottomfisher
Posts: 399
Joined: Fri Jan 04, 2013 9:03 am

Re: Stay the course and market timing mix strategy

Post by bottomfisher » Sat Apr 27, 2013 6:57 pm

I think your approach is reasonable. I'm of the opinion that markets are efficient but not entirely (100%) efficient. There may be opportunities available when many others panic and sell as a result of current events. Basically, what you're describing is a situation where the entire market has favorable valuations from a historical perspective. And academic research supports that better valuations influence returns to a certain extent. Some people refer to this as having 'dry powder.' It is indeed market timing and many on this forum discourage it. But you need to decide what the best risk adjusted strategy is best for you.

Jebediah
Posts: 579
Joined: Tue Aug 28, 2012 9:19 pm
Location: Austin TX

Re: Stay the course and market timing mix strategy

Post by Jebediah » Sat Apr 27, 2013 7:04 pm

I like the strategy as well, but realize that when times are bad it'll be because everyone is saying we're doomed for good, it's never coming back, Japan, etc, and they'll be able to make a good case for it too. So the whole thing is easier said than done. Would be better I think if you had a more quantitative than qualitative threshold to flip the switch to the higher contributions.

Scooter57
Posts: 1060
Joined: Thu Jan 24, 2013 9:20 am

Re: Stay the course and market timing mix strategy

Post by Scooter57 » Sat Apr 27, 2013 7:09 pm

In that same book, Bernstein describes value averaging. You might adopt that method so that you invest more when the market drops and less when it rises. You can get the book that describes value averaging in detail from some library systems. It eliminates the need to time the market, too.

Topic Author
Streptococcus
Posts: 307
Joined: Thu Jan 03, 2013 12:17 am

Re: Stay the course and market timing mix strategy

Post by Streptococcus » Sat Apr 27, 2013 7:09 pm

Jebediah wrote:I like the strategy as well, but realize that when times are bad it'll be because everyone is saying we're doomed for good, it's never coming back, Japan, etc, and they'll be able to make a good case for it too. So the whole thing is easier said than done. Would be better I think if you had a more quantitative than qualitative threshold to flip the switch to the higher contributions.
Very good point. I would think a drop > 20% in any of the total funds would be a good threshold.

User avatar
nedsaid
Posts: 12748
Joined: Fri Nov 23, 2012 12:33 pm

Re: Stay the course and market timing mix strategy

Post by nedsaid » Sat Apr 27, 2013 7:21 pm

I don't really market time but I have pounced when I think a certain asset class is cheap. I use extremes in the markets as opportunities to rebalance.

So while I don't believe much in market timing, I think you do have to pay attention to valuations. It seems to me that buying low and selling high is a good strategy. Buying stocks when they are cheap seems to me to be better than buying them when they are very expensive.

On the other hand, you have to pay attention to asset allocation. With my new money, I am still buying at 60 % stocks and 40% bonds even though I believe bonds are very expensive. If you are a believer in portfolio theory, you have to stick to a discipline. I am about 2/3 stocks and 1/3 fixed income at 53 years of age. I haven't sold stocks to buy bonds to rebalance because I am not enthusiastic about bonds. So what I have done is a bit of a compromise. Buying bonds with 40% of my new money is the investment equivalent of eating your spinach. It may not taste as good as other foods, but it is good for you.

So what you are planning to do does not sound crazy to me. Just remember that there are no guarantees, What you are doing is putting the odds in your favor the best you can.
A fool and his money are good for business.

John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: Stay the course and market timing mix strategy

Post by John3754 » Sat Apr 27, 2013 7:28 pm

If you have the ability to invest $3k/month during the downs, why not just increase your investment to $3k/ month all the time? Also, how far does the market have to decline in order to trigger this increased allocation? 5%? 10%? 20%? 30?

livesoft
Posts: 68548
Joined: Thu Mar 01, 2007 8:00 pm

Re: Stay the course and market timing mix strategy

Post by livesoft » Sat Apr 27, 2013 7:45 pm

You have described the RBD strategy which is the subject of many threads. Since the last "buy signal" a couple weeks ago, things are up about 3%. Not bad for 2 weeks, so maybe it is time to declare that the market has recovered and sell?
Wiki This signature message sponsored by sscritic: Learn to fish.

Jebediah
Posts: 579
Joined: Tue Aug 28, 2012 9:19 pm
Location: Austin TX

Re: Stay the course and market timing mix strategy

Post by Jebediah » Sat Apr 27, 2013 10:40 pm

^ aka, BTFD

Topic Author
Streptococcus
Posts: 307
Joined: Thu Jan 03, 2013 12:17 am

Re: Stay the course and market timing mix strategy

Post by Streptococcus » Sun Apr 28, 2013 7:44 am

livesoft wrote:You have described the RBD strategy which is the subject of many threads. Since the last "buy signal" a couple weeks ago, things are up about 3%. Not bad for 2 weeks, so maybe it is time to declare that the market has recovered and sell?
This is not the RBD strategy
1. The strategy that I describe consist in increasing the flow of investment by 50% during bear markets, that is, when total funds have a downturn of at least 20% for a least 2 months. Remember, I use the 3 fund lazy portfolio, not the volatile REIT, emerging market funds, etc. If one or more of my 3 lazy funds persistently stay below 20%, since they represent the broad market, that would definitely signal something going on.

2. Instead of "really bad day" I'd say "really bad years" would fit this strategy better. Over my 30 year investment horizon, I would likely implement this strategy less than 5 times, but each time, likely for several months or years. I'm not gonna teach you that recessions can take years to recover. You know it. This is in reality a portfolio stimulus. Just like the government stimulates the economy when things go south, you can do the same with your portfolio if you have the funds.

3. This is where the strategy gets tricky. To have the fortitude to increase monthly investments on your low performing Funds by 50% for years!! when everyone is saying that the low performing fund is dead, that this is another Japan, that all investments are wasted, not only do you stay the course, you increase your flow, for many years!!! that's the big risk that could bring big rewards. This is why I quotes Bill Bernstein who warned that it is possible for the US to emulate Japan and therefore, it is not impossible for my vanguard total stock index fund to go south for the next 20-30 years.

User avatar
Taylor Larimore
Advisory Board
Posts: 28808
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Stay the course vs. market timing? Ask the experts.

Post by Taylor Larimore » Sun Apr 28, 2013 8:18 am

Strep:
I would like our seasoned investors to educate me.
This is what seasoned investors say:
"The stock market will fluctuate, but you can't pinpoint when it will tumble or shoot up. If you have allocated your assets properly and have sufficient emergency money, you shouldn't need to worry." (AAII Guide to Mutual Funds)

"Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy." (Frank Armstrong, author and adviser)

"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, author, adviser)

"What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets." (Baer & Ginsler, The Great Mutual Fund Trap)

"If we haven't said it enough, we'll say it again: Market timing is dangerous." (Barron's Guide to Making Investment Decisions.)

"Only liars manage to always be "out" during bad times and "in' during good times. (Bernard Baruch, famed investor)

"You have to keep reminding yourself. We don't know what's going to happen with anything, ever." (Peter Bernstein)

"There are two kinds of investors, be thay large or small: those who don't know where the market is headed, and those who don't know that they don't know." (Wm Bernstein, author and adviser)

"I've said, 'Stay-the-course' a thousand times, and I meant it every time." (Jack Bogle, our mentor and Vanguard founder)

The Boglehead (forecasting) Contest began in 2001. Of 99 Diehard guesses that year, only 11 even guessed the direction of the stock market.

"If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor." (Jack Brennan, Straight Talk on Investing)

"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two." (Warren Buffet)

"Market timing is an ineffective strategy for mutual fund investors." (CDA/Wiesenberger)

"Any investment method that relies on predicting the future is doomed to fail." (Chandan & Sengupta, financial authors)

"A successful investor has a good knowledge base, a well-defined investment plan, and nerves of steel to stick with it." (Andrew Clarke, financial author)

"Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation." (2003 Dalber Study)

"Take my word on it. Buy-and-hold is still your best long-run strategy." (Jonathan Clements, author & journalist)

"Market-timing is bunk." (Pat Dorsey, M* Director of Fund Analysis."

"The performance of 185 tactical asset allocation mutual funds was compared with buy-and-hold strategies and equity mutual funds over the years 1985-97. Over this period the S&P 500 Index increased 734%, average equity funds increased 598%, and tactical asset allocation funds increased 384%." (David Dreman, author)

"Market timing is a wicked idea. Don't try it-ever." (Charles Ellis author of The Loser's Game)

"Forget market timing in any form." (Paul Farrell, (CBS Marketwatch.com)

"The best practice for investors is to design a long-term globally diversified asset allocation based on present and future financial needs. Then follow that plan religiously, through all markets good and bad." (Rick Ferri, author and adviser)

"Benjamin Graham spent much of his career trying to devise a goodformula for when to get into--and out of--the stock market. All formulas, he concluded, failed." (Forbes, 12-27-99)

"Buy and hold. Diversify. But your money in index funds. Pay attention to to the one thing you can control--costs." (Fortune Investor's Guide 2003)

"Dont' sell out of fear or buy out of greed. Just keep making investments, and let the market take its course over the long-term." (Norman Fosback, author, researcher)

"The only function of economic forecastng is to make astrology look respectful." (John Kenneth Galbraith, Economist)

"I've learned that market timing can ruin you." (Elaine Garzarelli)

"Staying on course may be just as difficult in bull markets as in bear markets." (Good & Hermansen, Index Your Way to Investment Success)

"For most investors the odds favor a buy-and-hold strategy." (Carol Gould, author & financial columnist)

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting that's going to happen to the stock market." (Benjamin Graham)

"From June 1980 through December 1992, 94.5% of 237 market timing investment newsletters had gone of business." (Graham/Campbell Study)

"Your very refusal to be active, and your renunciation of any pretended ability to predict the future, can become your most powerful weapon." (Graham & Zweig, The Intelligent Investor)

"The best advice: buy and hold." (John Haslem, author and researcher)

"Even in a bear market, market-timing and actively managed mutual funds generally hurt investment performance more than they help it." (Mark Hulbert, N.Y.Times columnist)

"After receiving the Nobel Prize, Daniel Kahneman, was asked by a CNBC anchorman what investment tips he had for viewers. His answer: "Buy and hold."

"Timing the market is for losers. Time IN the market will get you to the winner's circele, and you'll sleep better at night." (Michael Leboeuf, author)

"No one is smart enough to time the market's ups and downs." (Arthur Levitt, former SEC chairman)

"It never was my thinking that made the big money for me. It always was my sitting." (Jesse Livermore, author & famed investor)

"Nobody can predict interest rates, the future direction of the economy or the stock market." (Peter Lynch)

"Buying-and-holding a broad-based market index fund is still the only game in town." (Burton Malkiel, Random Walk Down Wall Street)

"At the peak of the bull market in March of 2000 only 0.7% of all recommendations on stocks issued by Wall Street brokerages and investment banks were to "Sell." (Miami Herald, 1-26-03)

"If you can't handle the short term, if the uncertainty is stressful and the headlines are unbearable, then the markets are too hot for you: get out of the kitchen." (Moshe Milevsky, author & researcher)

"We're not keen on market-timing. It just doesn't work." (Morningstar Course 106)

"We've yet to find anyone who can accurately and consistently predict the market's short-term moves." (Motley Fools)

"Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."

"Forget trying to time the market and do something productive instead." (Gerald Perritt, financial author)

"The market timer's Hall of Fame is an empty room." (Jane Bryant Quinn)

"Countless studies have proved that no one is able to time the market effectively." (Mary Roland, author & journalist)

"Trading is based on the rather arrogant belief that the trader knows more than the buyers and sellers with whom he is trading." (Ron Ross, The Unbeatable Market)

"In the long run it doesn't matter much whether your timing is great or lousy. What matters is that you stay invested." (Louis Rukeyser, TV host)

"For the 10 years that ended 12-31-2000, only one newsletter out of the 112 that Timers Digest follows managed to beat the S&P 500 Benchmark." (Jim Schmidt, editor)

"I have learned the hard way that market timing and trying to pick a fund that will out-perform the market are both losing strategies." (Larry Schultheis, author and advisor)

"I'm a strong advocate of buying and holding." (Charles Schwab)

"It turns out that I should have just bought them (securities), and thereafter I should have just sat on them like a fat, stupid peasant. A peasant however, who is rich beyond his limited dreams of avarice." (Fred Schwed Jr., 'Where are the Customers' Yachts?)

"If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor. (Chandan Sengupta, financial author)

"Investors should look with a jaundiced eye at any market timing system being peddled by its guru-creator." (W. Scott Simon, financial author)

"Buying and holding a few broad market index funds is perhaps the most important move ordinary invests can make to supercharge their portfolios." (Stein & DeMuth, (authors & advisor)

"It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom." (James Stewart, Smart Money columnist)

"It's a staple of personal finance advice: Buy-and-hold, because trading the stock market is a sucker's bet." Larry Swedroe, author and adviser.

"People should stop chasing performance and just put together a sensible portfolio regardless of the ups and downs of the market." (David Swensen, Yale Investments)

"Trust in time and forget market timing. Allow time to work its compounding magic for you. Let market timing inflict its miseries on someone else." (Tweddell & Pierce, financial authors)

"Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work." (Eric Tyson, author, Mutual Funds for Dummies."

"Few if any investors manage to be consistently successful in timing markets." (Wall Street Journal Lifetime Guide to Money)

"If you're considering doing your own market timing, the best advice is this: Don't." (John Waggoner, USA Today financial columnist)

"If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run." (Jason Zweig, author and Wall Street Journal columnist)
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

letsgobobby
Posts: 12080
Joined: Fri Sep 18, 2009 1:10 am

Re: Stay the course and market timing mix strategy

Post by letsgobobby » Sun Apr 28, 2013 8:37 am

Where is the extra $1000 per month coming from?

John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: Stay the course and market timing mix strategy

Post by John3754 » Sun Apr 28, 2013 8:46 am

Streptococcus wrote:
livesoft wrote:You have described the RBD strategy which is the subject of many threads. Since the last "buy signal" a couple weeks ago, things are up about 3%. Not bad for 2 weeks, so maybe it is time to declare that the market has recovered and sell?
This is not the RBD strategy
1. The strategy that I describe consist in increasing the flow of investment by 50% during bear markets, that is, when total funds have a downturn of at least 20% for a least 2 months. Remember, I use the 3 fund lazy portfolio, not the volatile REIT, emerging market funds, etc. If one or more of my 3 lazy funds persistently stay below 20%, since they represent the broad market, that would definitely signal something going on.

2. Instead of "really bad day" I'd say "really bad years" would fit this strategy better. Over my 30 year investment horizon, I would likely implement this strategy less than 5 times, but each time, likely for several months or years. I'm not gonna teach you that recessions can take years to recover. You know it. This is in reality a portfolio stimulus. Just like the government stimulates the economy when things go south, you can do the same with your portfolio if you have the funds.

3. This is where the strategy gets tricky. To have the fortitude to increase monthly investments on your low performing Funds by 50% for years!! when everyone is saying that the low performing fund is dead, that this is another Japan, that all investments are wasted, not only do you stay the course, you increase your flow, for many years!!! that's the big risk that could bring big rewards. This is why I quotes Bill Bernstein who warned that it is possible for the US to emulate Japan and therefore, it is not impossible for my vanguard total stock index fund to go south for the next 20-30 years.
This scenario assume that you have the ability to invest more than you are but instead you're holding back and investing less waiting for a bear market to come along. So what if it takes 5 years for your bear market to show up? Or 10 years? Or 20 years? Then you'd be holding cash out of the market for 5/10/20 years. Would increasing your allocation during the next bear market make up for the lost returns of holding cash out of the market for long periods of time?

bhughes1001
Posts: 27
Joined: Sat Aug 18, 2012 10:07 am

Re: Stay the course and market timing mix strategy

Post by bhughes1001 » Sun Apr 28, 2013 10:11 am

It seems like what you are trying to accomplish could more easily and safely be accomplished by just consistently investing the full 3,000 per month into your desired AA all along, irrespective of market behavior. When a particular fund is down, you would be purchasing more anyway. If you use your new contributions to get back to your desired AA, you'd be naturally adding more to underperforming assets, and better managing risk by keeping your AA intact. If adding new contributions doesn't get you back to AA, then rebalance would.

BH

livesoft
Posts: 68548
Joined: Thu Mar 01, 2007 8:00 pm

Re: Stay the course and market timing mix strategy

Post by livesoft » Sun Apr 28, 2013 10:39 am

bhughes1001 wrote:It seems like what you are trying to accomplish could more easily and safely be accomplished by just consistently investing the full 3,000 per month into your desired AA all along, irrespective of market behavior. ....
Yes, I agree with this. It requires no special timing skills and gets you there.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
Streptococcus
Posts: 307
Joined: Thu Jan 03, 2013 12:17 am

Re: Stay the course and market timing mix strategy

Post by Streptococcus » Sun Apr 28, 2013 10:41 am

letsgobobby wrote:Where is the extra $1000 per month coming from?
John3754 wrote:This scenario assume that you have the ability to invest more than you are but instead you're holding back and investing less waiting for a bear market to come along. So what if it takes 5 years for your bear market to show up? Or 10 years? Or 20 years? Then you'd be holding cash out of the market for 5/10/20 years. Would increasing your allocation during the next bear market make up for the lost returns of holding cash out of the market for long periods of time?
Streptococcus wrote:
livesoft wrote:You have described the RBD strategy which is the subject of many threads. Since the last "buy signal" a couple weeks ago, things are up about 3%. Not bad for 2 weeks, so maybe it is time to declare that the market has recovered and sell?
This is not the RBD strategy
1. The strategy that I describe consist in increasing the flow of investment by 50% during bear markets, that is, when total funds have a downturn of at least 20% for a least 2 months. Remember, I use the 3 fund lazy portfolio, not the volatile REIT, emerging market funds, etc. If one or more of my 3 lazy funds persistently stay below 20%, since they represent the broad market, that would definitely signal something going on.

2. Instead of "really bad day" I'd say "really bad years" would fit this strategy better. Over my 30 year investment horizon, I would likely implement this strategy less than 5 times, but each time, likely for several months or years. I'm not gonna teach you that recessions can take years to recover. You know it. This is in reality a portfolio stimulus. Just like the government stimulates the economy when things go south, you can do the same with your portfolio if you have the funds.

3. This is where the strategy gets tricky. To have the fortitude to increase monthly investments on your low performing Funds by 50% for years!! when everyone is saying that the low performing fund is dead, that this is another Japan, that all investments are wasted, not only do you stay the course, you increase your flow, for many years!!! that's the big risk that could bring big rewards. This is why I quotes Bill Bernstein who warned that it is possible for the US to emulate Japan and therefore, it is not impossible for my vanguard total stock index fund to go south for the next 20-30 years.
This scenario assume that you have the ability to invest more than you are but instead you're holding back and investing less waiting for a bear market to come along. So what if it takes 5 years for your bear market to show up? Or 10 years? Or 20 years? Then you'd be holding cash out of the market for 5/10/20 years. Would increasing your allocation during the next bear market make up for the lost returns of holding cash out of the market for long periods of time?
So where would the extra cash come from? and if it is available, why not invest it all the way? after all, holding cash with market timing intentions has been proven to decrease returns. These are excellent points.

The strategy that I described hinges on my specific professional situation. Being a physician in a community where the need for my service is overwhelmingly high, I put a limit to the number of patients I see daily and the number of calls that I take. But If needed, I could either take 1 or 2 more calls/month or bump up my daily appointments to make up for the additional cash.

Now if you ask me why I don't do that on a permanent basis, you would be making a very good point. The right answer would then be, what's the limit? I could increase my daily appointments by 50%, take 6 more calls/month, work 18hours a day and double my income. I don't need to. I'm already investing 75-80K/year according to the bogleheads philosophy and I have a 30 year horizon. And if needed, I could extend my horizon to 40 years by working into my high seventies, like my father plans to do and like many of my colleagues have done.

The strategy that I described was just to conjugate the need that my community has for more service with the opportunity to take advantage of a bear market by increasing exposure. But if the bear market does not occur, I'll still be fine because time is on my side.

tpm871
Posts: 149
Joined: Sun Sep 12, 2010 10:58 am

Re: Stay the course and market timing mix strategy

Post by tpm871 » Sun Apr 28, 2013 10:50 am

How about the following instead:

1. Have a "four fund" approach instead, using uninvested cash as your other "fund". For example:

45% total stock market
30% total international stock market
25% total bond market
0% cash

2. Look at your actual allocation percentages each month. If any of the non-cash funds are more than, say 10%, below its target allocation, contribute your $2,000 to the fund that is furthest below its target. For example, if total bond market is only 22.5%, it's 10% below its target of 25%. If you have any money in your cash allocation, use up to $1,000 from your cash allocation (i.e., $1,000 or as much as you have) to contribute to that fund as well.

3. For any month that none of your non-cash funds are 10% below their targets, contribute your monthly $2,000 to your cash allocation.

This will have you both maintaining your asset allocation and deferring your contributions until each fund is cheaper. Since each of those three funds may have their dips at different times, you'd be constantly investing in the best value rather than trying to time the market as a whole. Also, you'd never need to sell to rebalance, which is beneficial from a tax perspective.

This is kind of similar to the value averaging approach that another poster mentioned, but it's simpler and adapted for a multi-fund portfolio.

But as someone else mentioned, if you can afford to contribute $3,000 rather than $2,000 per month, it's better to just always contribute as much as you can afford (but using a strategy like above to defer when to invest).
Last edited by tpm871 on Sun Apr 28, 2013 11:23 am, edited 1 time in total.

bayview
Posts: 1867
Joined: Thu Aug 02, 2012 7:05 pm
Location: WNC

Re: Stay the course and market timing mix strategy

Post by bayview » Sun Apr 28, 2013 11:02 am

I'm not challenging you; I'm just confused on this:
tpm871 wrote:How about the following instead:
3. For any month that none of your non-cash funds are 10% below their targets, contribute your monthly $2,000 to your cash allocation.

This will have you both maintaining your asset allocation and deferring your contributions until each fund is cheaper. Since each of those three funds may have their dips at different times, you'd be constantly investing in the best value rather than trying to time the market as a whole. Also, you'd never need to sell to rebalance, which is beneficial from a tax perspective...
How is contributing to the cash fund during the months when the three real funds are within 10% of targets "investing in the best value"? I don't see how cash is the best value, and this would mean hoarding investable money in cash; i.e. timing. It would seem like the better plan would be to contribute according to the original AA to all three plans and keep them chugging along.

I do like the idea of having a slush fund in cash that can be used to get an underperforming fund back up to target.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

Topic Author
Streptococcus
Posts: 307
Joined: Thu Jan 03, 2013 12:17 am

Re: Stay the course and market timing mix strategy

Post by Streptococcus » Sun Apr 28, 2013 11:17 am

tpm871 wrote:How about the following instead:

1. Have a "four fund" approach instead, using uninvested cash as your other "fund". For example:

35% total stock market
15% total international stock market
25% total bond market
0% cash

2. Look at your actual allocation percentages each month. If any of the non-cash funds are more than, say 10%, below its target allocation, contribute your $2,000 to the fund that is furthest below its target. For example, if total bond market is only 22.5%, it's 10% below its target of 25%. If you have any money in your cash allocation, use up to $1,000 from your cash allocation (i.e., $1,000 or as much as you have) to contribute to that fund as well.

3. For any month that none of your non-cash funds are 10% below their targets, contribute your monthly $2,000 to your cash allocation.

This will have you both maintaining your asset allocation and deferring your contributions until each fund is cheaper. Since each of those three funds may have their dips at different times, you'd be constantly investing in the best value rather than trying to time the market as a whole. Also, you'd never need to sell to rebalance, which is beneficial from a tax perspective.

This is kind of similar to the value averaging approach that another poster mentioned, but it's simpler and adapted for a multi-fund portfolio.

But as someone else mentioned, if you can afford to contribute $3,000 rather than $2,000 per month, it's better to just always contribute as much as you can afford (but using a strategy like above to defer when to invest).
I don't plan to do any value averaging. The strategy was to do a monotonous monthly investment into a 3 fund portfolio and if a bear market occurs, that is 1 or more of the total funds falls below 20% for more than 2 months, increase the monthly contribution by 50%. It might happen tomorrow, in 5 years or never. It is not very important as this strategy is only the spice. Let's call it the Las Vegas moment. It would represent a small amount of my overall strategy which is to invest 75-80K/year in a three fund portfolio and stay the course in a 30 year time horizon.

letsgobobby
Posts: 12080
Joined: Fri Sep 18, 2009 1:10 am

Re: Stay the course and market timing mix strategy

Post by letsgobobby » Sun Apr 28, 2013 11:41 am

We did something similar in 2008-09. We used the financial crisis as a time to buy many things that were on sale: stocks, yes, but also TIPS, vacations especially overseas in devalued foreign currencies, prepaid tuition units, and eventually a house. We also thought about timeshares, second homes, and vacant land, but haven't pulled the trigger on any of those yet.

We raised this money by cutting back on more mundane discretionary purchases, and by shifting money from risk free assets (bonds and cash). I suppose you could call it market-timing.

If you want to work more to achieve higher discretionary income when the economy is down, and you spend that discretionary income on stocks, I think that'd be a good strategy. However, my fear is that the next time there is a big downturn, that will include medicine. And it may not be as easy as you plan to rise your income.

tpm871
Posts: 149
Joined: Sun Sep 12, 2010 10:58 am

Re: Stay the course and market timing mix strategy

Post by tpm871 » Sun Apr 28, 2013 11:53 am

bayview wrote: How is contributing to the cash fund during the months when the three real funds are within 10% of targets "investing in the best value"? I don't see how cash is the best value, and this would mean hoarding investable money in cash; i.e. timing. It would seem like the better plan would be to contribute according to the original AA to all three plans and keep them chugging along.

I do like the idea of having a slush fund in cash that can be used to get an underperforming fund back up to target.
No plan is always optimal. You are right that at times putting the money in cash is worse than investing in a fund, especially when there is momentum in the market. If the market always goes higher and never dips, this wouldn't do as well as always being 100% invested.

This approach tries to take advantage of market volatility, which I believe is a reality that just can't be avoided. When dips occur like summer of 2010 and 2011, you end up buying lots of shares at the bottom. When the market is steadily increasing, like is has been for the past several months, you end up buying mostly bonds and accumulating cash.

If the market continues as is right now indefinitely (i.e., continuing to steadily increase), this would have been a non-optimal strategy. But if the market dips in the future, I will have likely been better off buying at the dips rather than buying every month during the market peaks.

Although it sounds like market timing when I describe it this way, I don't think of it as market timing. This is a plan that is purely based on numeric conditions defined in advance. It is not simply reacting to current news and your gut instinct at the time (which is my definition of market timing).

I also think it is a less risky strategy overall. When the market is high (and thus at its greatest risk) you will tend to be less invested. When the market is low (and thus at its least risk) you will tend to be more invested (e.g., I was fully invested at the market low of March 2009).

Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Stay the course and market timing mix strategy

Post by Calm Man » Sun Apr 28, 2013 4:35 pm

OP, speaking doctor to doctor, it all sounds good. BUT --- why bother? It is a waste of your valuable non-working time and although it may increase your returns, it won't. I certainly would not plan my working life around the stock market, but that's me.

adam1712
Posts: 430
Joined: Fri Jun 01, 2007 5:21 pm

Re: Stay the course and market timing mix strategy

Post by adam1712 » Sun Apr 28, 2013 5:21 pm

This is something I've thought about before, mainly in terms of if it makes sense to defer big purchases to buy more stocks when the market has had a rough couple years.

I don't really consider this market timing in the traditional sense so much as reassessing your saving needs. If the markets haven't done well, you're farther from your retirement goals than you hoped and it makes sense to live a little more frugally, save a little more, work harder, etc. For me, when it comes to purchases, one challenge is the best deals on cars, houses, vacations often come when the market is down. If you have the chance to improve your income during recession times, that would be more ideal.

A lot of this comes down to how you personally view your retirement goals. Some people want to retire as quickly as possible and want to always be saving as much as possible to meet that goal. Others might only want to work as hard and save as much as required to have a comfortable retirement at a certain age. If the market does well during their life, they can live it up more.

There's also a hidden question of whether mean reversion exists. I don't personally believe in mean reversion very much. So I think if the markets haven't performed well the past couple years, chances are you're going to need to save more. Others believe if the markets haven't done well, there's a better chance of higher returns the next couple years.

User avatar
Artsdoctor
Posts: 4110
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Stay the course and market timing mix strategy

Post by Artsdoctor » Sun Apr 28, 2013 5:52 pm

Doctor to doctor, I understand your thinking here. There is a certain amount of give-and-take with income, and there are certain things you can control. The only problems are: how do you know where you are in a cycle? how do you really know how to value equities? which valuation method do you use? In retrospect, March 2009 was the bottom but we didn't know it at the time. Yes, in the fall of 2008, I gathered as many medical students and interns around and told them to start their retirement savings NOW. But I didn't know when the decline was going to end.

Because of the uncertainty in the market (as well as medicine right now!), I'd really recommend that you sock away as much as you can comfortably do now. If the market really takes a major downtown, then no problem shoveling in more if you can, but I wouldn't take your foot off the gas in good times as well.

Artsdoctor

leonard
Posts: 5993
Joined: Wed Feb 21, 2007 11:56 am

Re: Stay the course and market timing mix strategy

Post by leonard » Mon Apr 29, 2013 12:41 pm

Let's say we skip the market timing - which is shown not to work - keep it simple and just buy, hold, rebalance and stay the course. Seems easier to me.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Stay the course vs. market timing? Ask the experts.

Post by goodoboy » Mon Apr 29, 2013 4:38 pm

Taylor Larimore wrote:Strep:
I would like our seasoned investors to educate me.
This is what seasoned investors say:
"The stock market will fluctuate, but you can't pinpoint when it will tumble or shoot up. If you have allocated your assets properly and have sufficient emergency money, you shouldn't need to worry." (AAII Guide to Mutual Funds)

"Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy." (Frank Armstrong, author and adviser)

"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, author, adviser)

"What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets." (Baer & Ginsler, The Great Mutual Fund Trap)

"If we haven't said it enough, we'll say it again: Market timing is dangerous." (Barron's Guide to Making Investment Decisions.)

"Only liars manage to always be "out" during bad times and "in' during good times. (Bernard Baruch, famed investor)

"You have to keep reminding yourself. We don't know what's going to happen with anything, ever." (Peter Bernstein)

"There are two kinds of investors, be thay large or small: those who don't know where the market is headed, and those who don't know that they don't know." (Wm Bernstein, author and adviser)

"I've said, 'Stay-the-course' a thousand times, and I meant it every time." (Jack Bogle, our mentor and Vanguard founder)

The Boglehead (forecasting) Contest began in 2001. Of 99 Diehard guesses that year, only 11 even guessed the direction of the stock market.

"If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor." (Jack Brennan, Straight Talk on Investing)

"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two." (Warren Buffet)

"Market timing is an ineffective strategy for mutual fund investors." (CDA/Wiesenberger)

"Any investment method that relies on predicting the future is doomed to fail." (Chandan & Sengupta, financial authors)

"A successful investor has a good knowledge base, a well-defined investment plan, and nerves of steel to stick with it." (Andrew Clarke, financial author)

"Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation." (2003 Dalber Study)

"Take my word on it. Buy-and-hold is still your best long-run strategy." (Jonathan Clements, author & journalist)

"Market-timing is bunk." (Pat Dorsey, M* Director of Fund Analysis."

"The performance of 185 tactical asset allocation mutual funds was compared with buy-and-hold strategies and equity mutual funds over the years 1985-97. Over this period the S&P 500 Index increased 734%, average equity funds increased 598%, and tactical asset allocation funds increased 384%." (David Dreman, author)

"Market timing is a wicked idea. Don't try it-ever." (Charles Ellis author of The Loser's Game)

"Forget market timing in any form." (Paul Farrell, (CBS Marketwatch.com)

"The best practice for investors is to design a long-term globally diversified asset allocation based on present and future financial needs. Then follow that plan religiously, through all markets good and bad." (Rick Ferri, author and adviser)

"Benjamin Graham spent much of his career trying to devise a goodformula for when to get into--and out of--the stock market. All formulas, he concluded, failed." (Forbes, 12-27-99)

"Buy and hold. Diversify. But your money in index funds. Pay attention to to the one thing you can control--costs." (Fortune Investor's Guide 2003)

"Dont' sell out of fear or buy out of greed. Just keep making investments, and let the market take its course over the long-term." (Norman Fosback, author, researcher)

"The only function of economic forecastng is to make astrology look respectful." (John Kenneth Galbraith, Economist)

"I've learned that market timing can ruin you." (Elaine Garzarelli)

"Staying on course may be just as difficult in bull markets as in bear markets." (Good & Hermansen, Index Your Way to Investment Success)

"For most investors the odds favor a buy-and-hold strategy." (Carol Gould, author & financial columnist)

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting that's going to happen to the stock market." (Benjamin Graham)

"From June 1980 through December 1992, 94.5% of 237 market timing investment newsletters had gone of business." (Graham/Campbell Study)

"Your very refusal to be active, and your renunciation of any pretended ability to predict the future, can become your most powerful weapon." (Graham & Zweig, The Intelligent Investor)

"The best advice: buy and hold." (John Haslem, author and researcher)

"Even in a bear market, market-timing and actively managed mutual funds generally hurt investment performance more than they help it." (Mark Hulbert, N.Y.Times columnist)

"After receiving the Nobel Prize, Daniel Kahneman, was asked by a CNBC anchorman what investment tips he had for viewers. His answer: "Buy and hold."

"Timing the market is for losers. Time IN the market will get you to the winner's circele, and you'll sleep better at night." (Michael Leboeuf, author)

"No one is smart enough to time the market's ups and downs." (Arthur Levitt, former SEC chairman)

"It never was my thinking that made the big money for me. It always was my sitting." (Jesse Livermore, author & famed investor)

"Nobody can predict interest rates, the future direction of the economy or the stock market." (Peter Lynch)

"Buying-and-holding a broad-based market index fund is still the only game in town." (Burton Malkiel, Random Walk Down Wall Street)

"At the peak of the bull market in March of 2000 only 0.7% of all recommendations on stocks issued by Wall Street brokerages and investment banks were to "Sell." (Miami Herald, 1-26-03)

"If you can't handle the short term, if the uncertainty is stressful and the headlines are unbearable, then the markets are too hot for you: get out of the kitchen." (Moshe Milevsky, author & researcher)

"We're not keen on market-timing. It just doesn't work." (Morningstar Course 106)

"We've yet to find anyone who can accurately and consistently predict the market's short-term moves." (Motley Fools)

"Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."

"Forget trying to time the market and do something productive instead." (Gerald Perritt, financial author)

"The market timer's Hall of Fame is an empty room." (Jane Bryant Quinn)

"Countless studies have proved that no one is able to time the market effectively." (Mary Roland, author & journalist)

"Trading is based on the rather arrogant belief that the trader knows more than the buyers and sellers with whom he is trading." (Ron Ross, The Unbeatable Market)

"In the long run it doesn't matter much whether your timing is great or lousy. What matters is that you stay invested." (Louis Rukeyser, TV host)

"For the 10 years that ended 12-31-2000, only one newsletter out of the 112 that Timers Digest follows managed to beat the S&P 500 Benchmark." (Jim Schmidt, editor)

"I have learned the hard way that market timing and trying to pick a fund that will out-perform the market are both losing strategies." (Larry Schultheis, author and advisor)

"I'm a strong advocate of buying and holding." (Charles Schwab)

"It turns out that I should have just bought them (securities), and thereafter I should have just sat on them like a fat, stupid peasant. A peasant however, who is rich beyond his limited dreams of avarice." (Fred Schwed Jr., 'Where are the Customers' Yachts?)

"If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor. (Chandan Sengupta, financial author)

"Investors should look with a jaundiced eye at any market timing system being peddled by its guru-creator." (W. Scott Simon, financial author)

"Buying and holding a few broad market index funds is perhaps the most important move ordinary invests can make to supercharge their portfolios." (Stein & DeMuth, (authors & advisor)

"It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom." (James Stewart, Smart Money columnist)

"It's a staple of personal finance advice: Buy-and-hold, because trading the stock market is a sucker's bet." Larry Swedroe, author and adviser.

"People should stop chasing performance and just put together a sensible portfolio regardless of the ups and downs of the market." (David Swensen, Yale Investments)

"Trust in time and forget market timing. Allow time to work its compounding magic for you. Let market timing inflict its miseries on someone else." (Tweddell & Pierce, financial authors)

"Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work." (Eric Tyson, author, Mutual Funds for Dummies."

"Few if any investors manage to be consistently successful in timing markets." (Wall Street Journal Lifetime Guide to Money)

"If you're considering doing your own market timing, the best advice is this: Don't." (John Waggoner, USA Today financial columnist)

"If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run." (Jason Zweig, author and Wall Street Journal columnist)
Best wishes.
Taylor

Thank you Taylor for posting. I love it when you post this and the other one with quotes from buying the stock market index. Love it. Nice and simple.

retiredjg
Posts: 38399
Joined: Thu Jan 10, 2008 12:56 pm

Re: Stay the course and market timing mix strategy

Post by retiredjg » Mon Apr 29, 2013 4:44 pm

letsgobobby wrote:Where is the extra $1000 per month coming from?
This is my question as well.

If you are going to buckle down during the bad times and actually increase your savings for awhile, I don't see a problem with it. Makes more sense than doing a really buckle down sprint when the market is high. :D

But if the ability to come up with an extra $12k a year during the bad times indicates that you are wasting a lot of money during the good times, you might want to look at that instead.

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Stay the course and market timing mix strategy

Post by goodoboy » Mon Apr 29, 2013 4:57 pm

if a bear market occurs,
How do you know when a bear market occurs? Also, when is a bull market?

goodoboy
Posts: 406
Joined: Sat Nov 05, 2011 8:05 pm

Re: Stay the course and market timing mix strategy

Post by goodoboy » Mon Apr 29, 2013 5:01 pm

retiredjg wrote:
letsgobobby wrote:Where is the extra $1000 per month coming from?
This is my question as well.

If you are going to buckle down during the bad times and actually increase your savings for awhile, I don't see a problem with it. Makes more sense than doing a really buckle down sprint when the market is high. :D

But if the ability to come up with an extra $12k a year during the bad times indicates that you are wasting a lot of money during the good times, you might want to look at that instead.

I agree. Just invest whatever you have all the time and adjust your asset allocation and re-balance.

otbricki
Posts: 102
Joined: Mon Apr 08, 2013 1:28 pm

Re: Stay the course and market timing mix strategy

Post by otbricki » Mon Apr 29, 2013 5:13 pm

If you feel you must do something, work on finding the best mechanisms for your asset allocation. Lowest cost, best index tracking, best execution, best asset classes etc.

leonard
Posts: 5993
Joined: Wed Feb 21, 2007 11:56 am

Re: Stay the course and market timing mix strategy

Post by leonard » Mon Apr 29, 2013 6:00 pm

Streptococcus wrote:I would like our seasoned investors to educate me; why would such a market timing not be productive?
Always hate this approach: Convince me not to do X. It always smacks of someone that has made their decision and they are rationalizing it.

It's your money. You are the one with the vested interest in doing the research and getting it right. Presumably, that is why you are on this site.

So, why don't you take a crack at laying out the research that supports your market timing proposal? We can then critique your reasoning that you used to arrive at the conclusion. You get the same result - but the research and weight of putting together the argument is on your shoulders.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

User avatar
1210sda
Posts: 1525
Joined: Wed Feb 28, 2007 8:31 am

Re: Stay the course and market timing mix strategy

Post by 1210sda » Mon Apr 29, 2013 6:25 pm

Streptococcus wrote:I would like our seasoned investors to educate me; why would such a market timing not be productive?
Taylor Larimore just did......

1210

User avatar
ogd
Posts: 4875
Joined: Thu Jun 14, 2012 11:43 pm

Re: Stay the course and market timing mix strategy

Post by ogd » Mon Apr 29, 2013 6:50 pm

Streptococcus,

Given where the extra money is coming from, I don't think there's anything wrong with this at all. Maybe it helps to think of it like this: every year, you take an expensive vacation worth $12K, which you consider necessary for your well-being. When the market goes bad and your nest egg drops something like 20%, you cut back on this "luxury" and invest the money instead. You can tell yourself you're doing this to make up the losses -- which, I assure you, are a lot more motivating when you actually see them in writing on a quarterly statement than when you think about them in the abstract.

I assume you've given some thought to how long you'd be able to sustain the ramp-up without burning out and it's neither "no time at all" nor "forever". Spending some of that human capital in bad economic times seems like a fine and prudent idea to me.

(Btw, consider yourself lucky that you're in a position to choose to pull more money in a bad economy; most jobs are quite the opposite!)

Post Reply