Does a Boglehead ever time the market?

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pkcrafter
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Re: Does a Boglehead ever time the market?

Post by pkcrafter »

Welcome Matt,

o it seems to me that Mr Bogle is advocating that it is unwise to invest in overpriced markets, so the best thing I can do as an indexer, is to wait until the market is fair valued or undervalued, then invest for the long term in index funds.
Matt, you have a lump sum to invest that has never been in the market and you have never invested before? Approximately how much is the lump sum?
Would Mr Bogle really advocate a new investor to put his life savings into an index fund only to have 30 to 60% wiped out, potentially overnight. Surely in this case it would be wiser to wait.
Another way to view this is like the art analogy above. When the market drops, you will lose value, but you never lose the shares, so you are not "wiped out." Price fluctuations are unavoidable.
Or, is it economical to invest in an overpriced market?
I realize that once you are on the ship it makes sense to stay the course and stay in the market, but surely jumping on a ship heading from troubled water is unwise, so I should time the market?
How is it different once you are on the ship? I think you are showing some risk aversion, which is far better than pretending it does not bother you. First, get a sense of time. Your goal is decades away, so what happens in the short term isn't relevant.

I am rather curious as to what your desired asset allocation will be after the market resets. If you want to start with 30% stock now, it's pretty low, but it's more important to have a plan then to do knee-jerk reactions. Of course you are aware that you will not know when the time is right to up your allocation to another target AA.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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birdog
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Re: Does a Boglehead ever time the market?

Post by birdog »

Late last March I saw the light and sold several stocks that I had been actively trading and subsequently had a pile of cash sitting there to be plugged into the three-fund portfolio. I invested the bond portion right away but was scared to just lump-sum invest the VTI and VEU (Vanguard Total Stock and Vanguard Ex-US Stock) portions because the market was at ALL TIME HIGHS. I thought about sitting in cash and waiting for the next correction. I also thought about DCA’ing the money into those two stock funds. Instead, I held my nose and bought all at once. Since my purchases, VTI and VEU are up almost 14% and 15% respectively. I add to my three-fund portfolio every month and actually hope for a pullback from these new ALL TIME HIGHS so that I can buy even more shares each month for the same amount invested. My opinion is to just get the money in there and keep aggressively putting more in every pay period. Waiting for a 10% pullback isn’t so great if the market rises another 20% before that 10% pullback ever comes. And, BTW, nobody knows nothing.
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HomerJ
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Re: Does a Boglehead ever time the market?

Post by HomerJ »

Indexer Matt wrote: Sat Dec 09, 2017 5:35 pm However it does seem that even if the market is overpriced I agree with the consensus that it’s still a good ideal to get in the market. I just don’t think the bulk of my nest egg will be in stocks at the moment. Nedsaid has indicated that Mr Bogle does shift a percentage of assets when certain areas get overheated.

So it seems that I need to work out two asset allocation strategies, a short term strategy higher in Vanguard bonds, and a long term strategy higher in Vanguard stocks. The switching point will be when the stock market bottoms at the end of its next cycle. I agree that it doesn't matter when this happens, just that it will happen.

This means I will be pricing the market to full advantage in accordance with an inevitable reversion to the mean, without timing the market or trying to predict when things are going to happen.

Will this plan give me my Boglehead tattoo or am I still lacking?
You do not get the Boglehead tattoo.

You absolutely are timing the market. You want to be low on stocks at this moment in time, and higher in stocks at a different moment in time.

That is attempting to time the market. But it's not as easy as you think.

Let me give you a real life scenario. In 1996, CAPE crossed 25. It had NEVER been that high before except in 1929 before the Great Depression. People like you, and Shiller himself, figured the market was over-priced. Shiller predicted 0% 10-year real returns in 1996.

Well, the market more than doubled between 1996 and 2000. It did then indeed crash, but only 40%. It NEVER got as low as it was in 1996.

Read that again. Buying in 1996, a moment when the CAPE was the highest it had been in nearly 70 years, was still the cheapest time to buy stocks in the past 20 years. Instead of the predicted 10-year 0% real return, we got about 6% real, fairly close to the historical norm.

Look, I know you want to invest your money in the market when it's low, and get out when it's high. But it's not that easy. People get out too early, or get in too late. But I understand that you want to get the stock market gains when times are good, and avoid the losses when times are bad.

But here's the thing. You know that 7% real historical return people talk about? That INCLUDES the crashes. Read that again. You didn't have to avoid the crashes in the past to get a very healthy real return that would make you wealthy over time.

What we suggest is picking an allocation you can hold through the long term. Both ups and downs. You have a long time to invest. A crash won't hurt that much if you're 20 years from retirement. You have plenty of time for the market to come back and go higher. Again, I know you think it would be wonderful to avoid the crash, and just invest at the bottom. But it doesn't work like that, or everyone would be doing it.

If you wait to invest, what do you do if the market keeps going up? 20%, 40%, 60%? At what point do you think, oh crap, I should have gotten in! What if it goes up 60% and then drops 30%? Is that enough of a crash to get in? You'll still be buying higher than you could have today. What if you say, "No, I'm waiting until it's lower than today. Otherwise this whole waiting thing was pointless." So you determine to wait until it crashes 40%, and gets back down below where it is today...

But it starts going back up after only crashing 30%... Oh, crap, now what do you do? Is the bear over? Is a new bull starting? Should you get in? Maybe it's just a few days of up, and next week it will go down again... But what if it keeps going up? Oh no, how can you decide!! Why did you do this to yourself?

You're young. But I understand you don't want to throw in $500,000 all at once... I would pick ONE solid Asset Allocation that you could hold, even in a 50% bear market... Maybe 70/30 stocks/bonds. Maybe 50/50 stocks/bonds. Assume the market WILL crash 50% at some point, but you can also assume it will recover. This is retirement money, yes? You have time. Then DCA (dollar-cost average) to that allocation. Put in $50,000 at 70/30 or 50/50 every month for the next 10 months.

And then stay the course. Do NOT change that asset allocation just because you think stocks are over-priced or under-priced. That's market-timing. Stay the course, and let your money grow over time.
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Re: Does a Boglehead ever time the market?

Post by saltycaper »

Indexer Matt wrote: Fri Dec 08, 2017 1:37 am
Any help would be appreciated, investing books seem to have no advice regarding what a new investor should do in this situation.
You received a lot of good advice so far. I just wanted to say, if you set aside behavioral errors, psychological worries, taxes, bookkeeping considerations and the like, there isn't anything different a new investor should do compared to someone who has been investing for a long time. Previous gains or losses don't matter, and neither does how your dollars got here. If you imagine having the same amount of money you have today but having invested it for the past decade or two, the decision you make today should be no different than the decision you make given your actual circumstances.
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chevca
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Re: Does a Boglehead ever time the market?

Post by chevca »

Indexer Matt wrote: Sat Dec 09, 2017 5:35 pm For the record I am 34, timeframe is 20 years + and my nestegg is a lump sum, not a few hundred.
Why were you not investing while accumulating the nest egg? Or, was it a windfall?
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Re: Does a Boglehead ever time the market?

Post by JW-Retired »

Indexer Matt wrote: Sat Dec 09, 2017 5:35 pm Wow that is a lot of replies and a lot of info to digest, thanks to everyone for the advice and the time spent replying, its a bit overwhelming I feel like I have dived in head first. For the record I am 34, timeframe is 20 years + and my nestegg is a lump sum, not a few hundred.
No offense, but "not a few hundred" doesn't sound like very much to agonize over? Even if it's a million I would start putting it in at 5%/month or something like that. If the market keeps going up you can console yourself that you at least got something in at lower prices. If it soon goes down big like you fear, then you can put all the rest in .... if you have the nerve.

The main thing is don't just sit and wait until all the stars align. We hear from people who bailed out in 08/09 and have been waiting for a good reentry point ever since.
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livesoft
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Re: Does a Boglehead ever time the market?

Post by livesoft »

^I think you may have mis-read "not a few hundred." :) I think the OP may have a 6-figure or more windfall or something like that.

This thread is now just another "Invest Now or Wait?" thread.
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Re: Does a Boglehead ever time the market?

Post by JW-Retired »

livesoft wrote: Sun Dec 10, 2017 8:12 am ^I think you may have mis-read "not a few hundred." :) I think the OP may have a 6-figure or more windfall or something like that.
Maybe, but I was thinking 6-figures would have rated at least a "not a few thousand". :D
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Re: Does a Boglehead ever time the market?

Post by RadAudit »

chevca wrote: Sun Dec 10, 2017 6:02 am
Indexer Matt wrote: Sat Dec 09, 2017 5:35 pm For the record I am 34, timeframe is 20 years + and my nestegg is a lump sum, not a few hundred.
Why were you not investing while accumulating the nest egg? Or, was it a windfall?
Whoops. Hold the phone. We've just crossed over to a whole new set of questions. Indexer Matt may want to think about asset allocations for the portfolio. If so, please read viewtopic.php?t=6212 , start a new thread and post your answers to those questions there. If it is a windfall, please read and heed https://www.bogleheads.org/wiki/Managing_a_windfall
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
chevca
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Re: Does a Boglehead ever time the market?

Post by chevca »

I asked this early on.....
chevca wrote: Fri Dec 08, 2017 7:26 am Is this new investor's life savings $500k cash they squirreled away, or someone just starting out with a portfolio of a few hundred bucks?

If it's the cash one, we could talk lump sum or DCA. If it's the few hundred bucks one, just start investing and pick a plan you can stick with for the long haul.
I think that's what OP was referring to when they said it's not just a few hundred. So, it would seem six figures might be likely?

I agree there are more questions that need answered and some more information from the OP would be nice. Why are they a new investor with a life savings of seemingly a large amount?
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Re: Does a Boglehead ever time the market?

Post by itstoomuch »

Tadamsmar wrote: The lack of long-term risk-adjusted return could just be cherry-picking bias. If you pick only the best cherries, or if you analyze only the most successful national market in history, the some risk will indeed be missing :wink:.
One of my fondest memories in farming was sitting on a 12 foot ladder and cherry picking.
You will never find the perfect cherry. Some branches, some trees, some years are better than others. 2017 was a good year for fruit & cherries but they tasted awful. Kinda depends what you are seeking.
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Re: Does a Boglehead ever time the market?

Post by ruralavalon »

Indexer Matt wrote: Sat Dec 09, 2017 5:35 pm Wow that is a lot of replies and a lot of info to digest, thanks to everyone for the advice and the time spent replying, its a bit overwhelming I feel like I have dived in head first. For the record I am 34, timeframe is 20 years + and my nestegg is a lump sum, not a few hundred.
At age 34 I suggest about 20 - 25% in bonds. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk", and "Asset allocation".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). You can find lots of debate here on international allocation, opinions rangeing all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box (upper right, this page).

This works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.


Indexer Matt wrote: Sat Dec 09, 2017 5:35 pmSo my conclusions are…
It seems that the hardest decision is to invest my nestegg either via Dollar Cost Averaging or all at once. (I am leaning towards going all in)
It also seems that the heart of my dilemma can be solved by asset allocation. If I were to invest a large percentage into high quality bonds I could actually benefit from any reversion to the mean in the stock market. Perhaps 70% in bonds.
You are right to feel that asset allocation is a key in controlling risk. In my opinion 70% bonds (fixed income) is far too conservative.

Market timing (waiting for a good time to buy into the stock market) is a fool's errand. No one can successfully do that consistently. If you wait for a good day to buy, you will never know if the next day, or the next week, or the next month, or the next year might be an even better time to buy. For interesting reading look at the thread "U.S. stocks in freefall". Since the start of that thread on August 8, 2011, total return of Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) is up 150%, and $10,000 has grown to be $25,033.

It was always my policy to invest whenever I had extra money available to invest.

The compromise solution is to invest 50% in a lump sum now, and invest the rest in stages (for example an additional 05% on a predetermined date each month for the next 10 months). Don't needlessly agonize over when the best time may be to invest.


Indexer Matt wrote: Sat Dec 09, 2017 5:35 pmHowever it does seem that even if the market is overpriced I agree with the consensus that it’s still a good ideal to get in the market. I just don’t think the bulk of my nest egg will be in stocks at the moment. Nedsaid has indicated that Mr Bogle does shift a percentage of assets when certain areas get overheated.

So it seems that I need to work out two asset allocation strategies, a short term strategy higher in Vanguard bonds, and a long term strategy higher in Vanguard stocks. The switching point will be when the stock market bottoms at the end of its next cycle. I agree that it doesn't matter when this happens, just that it will happen.

This means I will be pricing the market to full advantage in accordance with an inevitable reversion to the mean, without timing the market or trying to predict when things are going to happen.
I looks to me like you are over thinking this with the idea of "need[ing] to work out two asset allocation strategies, a short term strategy higher in Vanguard bonds, and a long term strategy higher in Vanguard stocks. The switching point will be when the stock market bottoms at the end of its next cycle." I think the consensus approach, and the better approach, is to select an asset allocation that you feel you can live with in all market conditions, invest using that asset allocation, and stay the course.

This could be something like what I suggested above -- 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk. So read the links and other information on asset allocation, and make your own decision.

As for a "switching point" when the "the stock market bottoms at the end of its next cycle", you will never know when that is until after the bottom has occured. When you think it might be the "bottom" and a good day to buy into the stock market, you will never know whether the next day, or the next week, or the next month, or the next year might be an even better time to buy into the stock market.


Indexer Matt wrote: Sat Dec 09, 2017 5:35 pmWill this plan give me my Boglehead tattoo or am I still lacking? :)

Right now I am reading the "Bogleheads Guide to investing" lots of good info in that book as well.
That's a good choice in reading material to learn the basics and more. I suggest that you read more on general investing. Wiki article, "Books: recommendations and reviews". My book suggestion would be All About Asset Allocation, by Rick Ferri, or The Four Pillars of Investing, by William Bernstein. When I first stated managing my own investments, I found this tutorial very helpful in learning investing terminology/jargon and some of the investing basics. Morningstar, "Investing Classroom". Also take a look at the Boglehead’s wiki, the "getting started" link I give below
Last edited by ruralavalon on Sun Dec 10, 2017 4:59 pm, edited 1 time in total.
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MrPotatoHead
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Re: Does a Boglehead ever time the market?

Post by MrPotatoHead »

Does a Boglehead ever time the market?

Yes. Asset allocation based re-balancing is a type of market timing it is just done in the absence of spotted newts, constellations, Loch Ness monster sightings or the other voodoo that most market timing systems seem to rely on.
michaeljc70
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Re: Does a Boglehead ever time the market?

Post by michaeljc70 »

As others have said, if I had a large amount not in the market I would DCA in. Otherwise, if just adding on a monthly or bi-monthly basis, I would just put it in regularly on a schedule

BTW...the Shiller CAPE includes earnings from the financial crisis. I don't give the Shiller CAPE much weight. Shiller has been calling stocks overvalued for years.

https://www.cnbc.com/2015/09/03/risk-of ... iller.html
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Re: Does a Boglehead ever time the market?

Post by DrGoogle2017 »

Absolutely, we even have somebody with the handle Maket Timer.
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Indexer Matt
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Re: Does a Boglehead ever time the market?

Post by Indexer Matt »

Thanks again for all the advice, in particular RuralAvalon and Homer J,

I have purchased Ferri's Asset Allocation book, hopefully it will give a full understanding of the theory before I take the plunge.

Thanks to all,
Matt.
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