But really, are you going to sit through 40% plus losses?

[spidercharm]

I learned something hard way....the only way you can make money trading is if you are right more than you are wrong. This is knowing that market has the same information (likely more) as you do.

I made some money trading, which I more than lost while shorting during the recent bull run. I only tried it with small amounts just to see. But, most of my long-term investments are in index funds, which I don't plan to sell for a long long time.

The point is - if you know how markets are likely to behave, time it by all means. In fact, if you really know - you can make millions and retire early. The reality is no one ever knows for sure.....so market timing is purely a game of luck. Sure, you might turn out to be winner once in a while, like playing roulette. Given enough time, house always wins.

[grayfox]

A market timer writes:

As an investment advisor that uses Market Timing and other Tactical Approaches to the market, I get my share of criticism from the Buy and Hold crowd. The best system over the last 12 months has been Buy and Hold. But really, are you going to sit through 40% plus losses? I don’t think so.

We've had a startling couple of days, and it is certainly seems more possible that we could be headed for that kind of a fall than it has seemed on recent weekends.

Darn it all, I'd finally gotten to the point where I literally was not even looking at the Dow every week. Now this.



What is our personal answer to the market timer's perennial question?

I voted It's too early to decide. I'll wait and see and follow my instincts.

My plan is to stay in the stock market as long as there is positive momentum, even if the stock market gets in a bubble. If momentum turns negative, then I might bail out of the market. Especially, if it's over-valued.

Well, momentum is still positive, at least for U.S. stocks, measured by the 200-day moving averages. The foreign stocks are not looking so strong wrt momentum

SPY http://stockcharts.com/h-sc/ui?s=SPY&p= ... 5033437251
VTSMX http://stockcharts.com/h-sc/ui?s=VTSMX& ... 5033437251
VGTSX http://stockcharts.com/h-sc/ui?s=VGTSX& ... 5033437251
EZU http://stockcharts.com/h-sc/ui?s=EZU&p= ... 5033437251

As far as valuations, from this chart , it looks like S&P500 P/E10 was knocked back down to 20.15 from over 22. My guestimate is that the expected 30- year real return of stocks is now about 4 to 4.5% annual.

Meawhile, in the past several weeks, 30-year TIPS real yields have gone from about 2.2% down to 1.789%. From my Fish Market Theory of Stock Market Valuation, that would make stocks a better deal than TIPS at P/E10 = 22 to 25. So if I had a choice between buying stocks or TIPS, stocks are better priced. (Neither stocks nor TIPS are at good prices to buy. They are both lousy deals, IMHO.)

I suppose this is because of the uncertainty in Euroland. The wheels may come off the world economy and stocks may end up at P/E10=8 by next year.

With the drop in price, my equity allocation went from about 10.6, I recall, to now 9.9% My target is about 10% or 10.3% so in theory I should add some to equities. Maybe I should add to Wellesley Income on Monday.

Another thing I noticed last week both Gold and LT Treasuries went up, so Harry Brown PP probably did OK. LT Corporate Bonds went down along with stocks. Junk bonds got hammered. Oil and commodities went way down. These events are very interesting.

Here are other 200-day charts for reference:

SPX http://stockcharts.com/h-sc/ui?s=SPX&p= ... 5033437251
VGSIX http://stockcharts.com/h-sc/ui?s=EDV&p= ... 5033437251
GLD http://stockcharts.com/h-sc/ui?s=GLD&p= ... 5033437251
SLV http://stockcharts.com/h-sc/ui?s=SLV&p= ... 5033437251
PCRIX http://stockcharts.com/h-sc/ui?s=PCRIX& ... 5033437251
OIL http://stockcharts.com/h-sc/ui?s=OIL&p= ... 5033437251
VUSTX http://stockcharts.com/h-sc/ui?s=VUSTX& ... 5033437251
TLT http://stockcharts.com/h-sc/ui?s=TLT&p= ... 5033437251
EDV http://stockcharts.com/h-sc/ui?s=EDV&p= ... 5033437251
VIPSX http://stockcharts.com/h-sc/ui?s=VIPSX& ... 5033437251
VWESX http://stockcharts.com/h-sc/ui?s=VWESX& ... 5033437251
VWEHX http://stockcharts.com/h-sc/ui?s=VWEHX& ... 5033437251

[JW-Retired]

If my past actions indicates what I will do in the future, then I will be purchasing equities all the way down to the bottom and beyond.

Do you sell them again at roughly the same prices on the way back up from the bottom? i.e., are you maintaining your AA constant? Does that really accomplish anything?

I held the equities in the 70's, 1987, 2000-2002, 2008 ...... always. Had a high percentage of equities until the mid-90s. Never give panic bailing out a thought. However, now that I'm older and have 40-50% in bonds, I don't "purchase equities all the way down" in order to rebalance to some fixed AA. I really think that doesn't accomplish much most of the time and is risky of the ultimate crash. It's not the common 40% drop and recovery cycle I worry about. Only the low probability that some huge economic disaster/war/whatever makes the market go down by perhaps 80-90%, and stay there for many years. Could happen. If that scenario does happen, I sure don't want to have sold much of my bonds/cash buying more equities all the way down. Not at my age for sure.
JW

[livesoft]

If my past actions indicates what I will do in the future, then I will be purchasing equities all the way down to the bottom and beyond.

Do you sell them again at roughly the same prices on the way back up from the bottom? i.e., are you maintaining your AA constant? Does that really accomplish anything?

I have noted a rebalancing move I already performed earlier this year: http://www.bogleheads.org/forum/viewtopic.php?t=54057
I do keep my AA roughly constant. Yes, it does accomplish nice things.

The only investments I have purchased this year with new cash are bond funds in 401(k)s and the emerging markets small cap etf DGS in Roths. These investments have not lost money ... yet. Give them time, maybe they will drop in value.

[jeffyscott]

The foreign stocks are not looking so strong wrt momentum...

Not sure it makes much sense to look at foreign as one big lump, when looking for momentum. If you narrow it down at least a little, such as by looking at the eurozone (EZU), I think the momentum followers should have already sold?

[grayfox]

The foreign stocks are not looking so strong wrt momentum...

Not sure it makes much sense to look at foreign as one big lump, when looking for momentum. If you narrow it down at least a little, such as by looking at the eurozone (EZU), I think the momentum followers should have already sold?

Right, it looks like the folks using the 50/200 EMU would have been out of EZU on 5th May.

EZU http://stockcharts.com/h-sc/ui?s=EZU&p= ... 5033437251

[Martindo]

We're both in our 60s, one retired, one working. 35% stock allocation. We would be entirely solvent following a 50% stock market decline.

BUT, two large corrections in 10 years, (are we discussing a 3rd?), wild gyrations from "fat fingers,"... all this has combined to make us feel less like "investors" in something objective and more like "craps shooters." While we understand that we may have a 20-30 year investment horizon and, perhaps, should hold equities for a variety of reasons, we can no longer believe that we should just gleefully "buy on the dips." So, our IPS now includes a stock allocation glide path that would get us to 25% equities in five years. We'll just sell equities to that standard, but not buy into equities if we get below the glide path.

[rockbottom]

The tide comes in and goes out twice every day, and there are high and low tides within every longer period of time you can name.

A stock market drop only means a loss if you find you have to sell for less than the equivalent of your buying price, or if companies you own a piece of go out of business.

Otherwise, it's better to view changes in price the same way you view the tides.

[eucalyptus]

Dow still over 10,000.

I'm a buyer in the 7000s.

[grayfox]

With the drop in price, my equity allocation went from about 10.6, I recall, to now 9.9% My target is about 10% or 10.3% so in theory I should add some to equities. Maybe I should add to Wellesley Income on Monday.

For anyone that's interested, on Monday when I looked at adding to stocks the market was already way up. Too late. Equity allocation was back around 10.3%. Instead I actually reduced equity by about 1% to about 9.3% by moving a 100% stock fund into Wellesley Income, which is only 35% stocks. Maybe someday I'll have almost everything in Wellesley Income.

What I added to today was real assets, specifically a commodity oil in the form of ETF USO, because oil went way down. My goal is to have an amount in real assets equal to the amount in equities, a nod to Harry Brown. Here is my current AA:

Class Target Actual
Equity 10 9.3
Real 10 7.3
LT 10 26.6
IT 10 24.6
ST 10 12.1
TIPS 50 21.3

Actually this is really 40% HB-inspired and 60% TIPS and IT Bonds. The difference is I have more real assets than gold, I have bonds other than LT Treasuries and my equity is split between U.S. and International HOP. (For some reason, whenever I hear about International funds, I always think of IHOP.)

[ianferrel]

The Fundamental Principal of Counting, the entire basis of probability theory, explains why. It never fails to strike me how many market timers don't understand this concept that they learnt in secondary school.

There are 3 decisions because it takes 3 choices to make a profit timing the market. It is usually thought that it is 2 choices, but that can't be true since the first two decisions are dependant on the last one in order to continue timing the market. Otherwise it's a case of walking away from the casino never to return.

Decision One: When to buy.
Decision Two: When to sell.
Decision Three: When to buy back in again.

Sorry, but this is simply horribly wrong, for two reasons. First, you're overcounting the chances involved. Each buy/sell cycle has a 50% chance of profitability because, on a random walk, the chance that your buy price will be lower than your sell price is 50%. It's not 50% that you'll choose the "right" buy price and then 50% that you'll chose the "right" sell price, giving you a 25% chance. It's 50% chance per cycle.

Second, you're overcounting the "buy" part of a cycle. Each cycle of "timing the market" involves one buy, and one sell. If you string them together, you get an alternating sequence of buy/sell. You seem to be counting each cycle as including a buy, a sell, and then a buy (that's really part of the next cycle). Stringing these together, you get twice as many buys as sells, which doesn't make sense.

Whether or not you're going to invest again in the future has no bearing on whether you made a profit on this cycle.

Of course, in the long run, your expected value from this process is based on long-term trends and transaction costs. You can't really do anything about the long-term trends, but the more you buy and sell, the worse your losses to transaction costs are.

[detifoss]

rebalancing has been my best friend

so yes, I will watch a 40% drop, if it occurs (I seriously doubt it anytime soon - double reverse jinx), and then I will rebalance as my triggers are hit.

I'm not 100% equities (75/25 is about where it is), but even at a 50+% loss in my overall portfolio in March of 2009 I was rebalancing into equities and REITs like a robot. It has treated me well. Risk control is important. So too is a rebalancing bonus if it exists. More importantly is that I took the emotion out of it and did what my plan said to do. Had I not rebalanced, I would have missed some of the (epic) gains in some of my asset classes, but had I cashed out or moved to fixed income when the house was on fire, then I would have been badly, badly burned.

The vicious bear market we went through was an excellent fire drill for me. My AA passed. So did I. As long as the next one doesn't burn the entire market down to zero, my AA wll pass the test again, and I too will pass.

I'm only 34, but my portfolio is already much larger than my yearly income, and watching it move up and down by more than my take home paycheck in a single day is kind of interesting, but does not change my plans at all. The plan was made the way I made it for a reason.

If I see a post about plan B I'll know it's time to re-read and focus on my plan again (if my plan ever hasa Plan B, then I will know it is the wrong plan), but I'm not with the crowd that 'overbalances' into equities when they fall a large percentage and the plan B posts show up - though those folks I'm sure did extremely well in this recent market - they added risk, they deserve their rewards.