A Simple Market Timing Strategy That Works?

[Park]

https://www.whitecoatinvestor.com/6-thi ... ar-market/

The above link is a good article on what to do in a bear market, and includes several strategies that are commonly suggested. However, it also includes a strategy, that is less often discussed:

"Defer Major Purchases and Prioritize Investments
...A bear market is the time to be pouring money into the market, buying low, rather than taking it out. Thus, it is a great time to defer some of your major purchases. This is not the time to buy a new car, purchase that boat you’ve had your eye on, remodel the kitchen, or take that dream trip to Tahiti. This is the time to fund your Backdoor Roth IRAs, accelerate your 401(k) contributions, start that taxable investing account"

A strategy of deferring discretionary spending during bear markets is market timing. Market timing has a well deserved poor reputation, but this market timing strategy makes sense to me.

Comments?

[frcabot]

I suppose that’s market timing, but not in the traditional sense. Traditional market timing would say sell as the investments start to decrease, buy when they start to go up (ie the reverse of what should be done). Buy the dip is, I suppose, market-timing, but it’s the “correct” form of market-timing.

“Buy the dip” could also just be thought of as rebalancing, however. If you have x percent stocks and y percent bonds/fixed income, as x decreases, one would shift y (cash, bonds, fixed income) into more stocks to reset to desired AA.

[JoMoney]

If you could "accelerate" your contributions even earlier, rather than waiting for a drop, it would likely work out even better.

[sd323232]

I suppose that’s market timing, but not in the traditional sense. Traditional market timing would say sell as the investments start to decrease, buy when they start to go up (ie the reverse of what should be done). Buy the dip is, I suppose, market-timing, but it’s the “correct” form of market-timing.

“Buy the dip” could also just be thought of as rebalancing, however. If you have x percent stocks and y percent bonds/fixed income, as x decreases, one would shift y (cash, bonds, fixed income) into more stocks to reset to desired AA.

I didn't know there was traditional market timing.

According to investopedia definition is market timing is:

"Market timing is a type of investment or trading strategy. It is the act of moving in and out of a financial market or switching between asset classes based on predictive methods. These predictive tools include following technical indicators or economic data, to gauge how the market is going to move."

OP post def talks about market timing.

[bertilak]

If you could "accelerate" your contributions even earlier, rather than waiting for a drop, it would likely work out even better.

I suppose I am being obvious in seeing your comment as a bit sarcastic. Of course more aggressive buying will improve your returns! (More invested means more returns regardless.) The "sarcasm" is in that unsaid "of course."

But I think what is actually being suggested includes the idea that whatever spending is deferred (in favor of investing) will eventually be done (at the expense of investing) so there really is some market timing going on.

[AerialWombat]

But I think what is actually being suggested includes the idea that whatever spending is deferred (in favor of investing) will eventually be done (at the expense of investing) so there really is some market timing going on.

But is there anything really wrong with that?

I actually like this idea.

[bertilak]

But I think what is actually being suggested includes the idea that whatever spending is deferred (in favor of investing) will eventually be done (at the expense of investing) so there really is some market timing going on.

But is there anything really wrong with that?

Not much, but it does imply one can actually defer some spending -- there is some discretionary spending that is deferrable -- e.g. not mortgage payments.

[yogesh]

A balanced/target-date fund would have sold a lot of bonds/cash to buy stocks at low automatically. Doing that manually is fair game.

It’s far too easy to say this during bull period than to actually do it during bear. You don’t know if it has dropped enough and scared to invest. Which is why “stay the course” and avoid selling low as first thing to remember and if you have strong heart buy more equities on sale. I would call this rebalance than market timing.

[EnjoyIt]

Hold on a sec. If you are planning a home purchase for example, a great time is during a recession when people are forced to sell at depressed prices. If you are buying a car or a boat, you will find better deals when very few others are buying. You can get a really nice sports car or boat off of someone who over leveraged themselves and lost their job. You need to remodel the kitchen? No better time than a recession since most builders will be out of work and will be willing to do the job at a lower cost.

[abuss368]

I would be careful as market timing has been proven to not work. Security selection does not work. Asset allocation is the most important decision an investor can make.

Jack Bogle often said with regards to market timing that an investor has to be right twice. When to get out and when to get in.

[MotoTrojan]

If you could "accelerate" your contributions even earlier, rather than waiting for a drop, it would likely work out even better.

+1. It’s 100% market timing to save less when the market is going up.

[firebirdparts]

Sure, why not? This might remind you of rebalancing. Rebalancing is really pretty elegant; you can market time based on the present instead of the future. In this case, Instead of rebalancing from bonds, you're rebalancing from your business at the furniture store, and a new lawn mower, and that sort of thing.

Market Timing in the past works every time. It only breaks down when you try to do it in the future. You can see from the above responses that you can sometimes set off a semantic argument just based on the words used.

[delamer]

Hold on a sec. If you are planning a home purchase for example, a great time is during a recession when people are forced to sell at depressed prices. If you are buying a car or a boat, you will find better deals when very few others are buying. You can get a really nice sports car or boat off of someone who over leveraged themselves and lost their job. You need to remodel the kitchen? No better time than a recession since most builders will be out of work and will be willing to do the job at a lower cost.

Assuming that the bear market goes hand-in-hand with a recession — which is often but not always the case — then I agree.

[greg24]

In both bear and bull markets, forgoing home improvements in order to increase your investments will result in a better financial outcome.

[Alaric]

If you have, for example, a 50/50 AA as your plan and then a 15% stock market correction reduces your equity value, then you are now at 54/46. Simply rebalancing back to your original 50/50 AA takes advantage of the lower stock prices and was part of your original strategy in the first place.

Now if equities and bonds both fall 15% and you sell bonds to buy more stocks "on sale," that would be pure market timing.

[usagi]

https://www.whitecoatinvestor.com/6-thi ... ar-market/

The above link is a good article on what to do in a bear market, and includes several strategies that are commonly suggested. However, it also includes a strategy, that is less often discussed:

"Defer Major Purchases and Prioritize Investments
...A bear market is the time to be pouring money into the market, buying low, rather than taking it out. Thus, it is a great time to defer some of your major purchases. This is not the time to buy a new car, purchase that boat you’ve had your eye on, remodel the kitchen, or take that dream trip to Tahiti. This is the time to fund your Backdoor Roth IRAs, accelerate your 401(k) contributions, start that taxable investing account"

A strategy of deferring discretionary spending during bear markets is market timing. Market timing has a well deserved poor reputation, but this market timing strategy makes sense to me.

Comments?

The time to remodel, the time to do expansions of your business or home, the time to buy a car, truck etc is precisely when you can buy a dollar for 40 cents. That is what happens in recessions, you can lock in savings immediately. You should always fund your Roth, 401K, and after tax investments anyways. And while bears do not mean recessions often they are correlated. Moreover by buying when prices are down you provide stimulus and employment to the economy when it needs it.

There is a 2005 Thunderbird I have my eye on in my neighborhood. I know the family that owns it had kids starting college so I am hoping next economic downturn I can pick it up cheap. : )

[pdavi21]

If you eliminate all optional spending, it is impossible to use this market timing strategy. Since eliminating all optional spending is a better strategy, I would say this market timing strategy does not work.

[dkturner]

Hold on a sec. If you are planning a home purchase for example, a great time is during a recession when people are forced to sell at depressed prices. If you are buying a car or a boat, you will find better deals when very few others are buying. You can get a really nice sports car or boat off of someone who over leveraged themselves and lost their job. You need to remodel the kitchen? No better time than a recession since most builders will be out of work and will be willing to do the job at a lower cost.

Assuming that the bear market goes hand-in-hand with a recession — which is often but not always the case — then I agree.

A bear market generally precedes a recession. The opportunity to take advantage of recession created spending opportunities generally comes at the end of a bear market, when equity prices are depressed. Spending should come from fixed income investments, which results in an odd form of portfolio “rebalancing”.

We have fond memories of a very inexpensive extended vacation in Hawaii in late 2009.

[Bluce]

A balanced/target-date fund would have sold a lot of bonds/cash to buy stocks at low automatically. Doing that manually is fair game.

It’s far too easy to say this during bull period than to actually do it during bear. You don’t know if it has dropped enough and scared to invest. Which is why “stay the course” and avoid selling low as first thing to remember and if you have strong heart buy more equities on sale. I would call this rebalance than market timing.

I agree. It's been easy to "buy the dips" (although I haven't) in recent years during this long bull, but maybe some people are becoming complacent.

I remember the fall of 2007 when the market started eroding. Nothing really fast, as I recall, just more downs than ups. People probably bought those "dips," only to find out in 2008 -- when the real action started -- that they were falling into a bottomless hole and their new purchases were losing value with no end in sight.

[yogesh]

Active managers sitting in front of monitors/data 24/7 can’t get this right so it’s bit far stretch for normal investors to claim bottom.

Now if you have bots that trigger buy watching SMA; that could get you closer. Head over to IFTTT to get buy alert