We all know the stock market has been on a tear the past couple years making us all look like Warren Buffett. My 401(k) is up nearly 14% so far this year and all I've done is stay the course. I think I've looked at my asset allocation maybe once this year and there wasn't much to see. The percentages were a little off but nothing that required rebalancing, so I left it alone.
I'm a young guy, only 26, so I have a pretty aggressive 90/10 stocks-to-bonds allocation. I follow a lot of the Boglehead principals: keeping my portfolio simple, going for funds with low fees, etc., and so far it's worked.
But I think nearly every investment strategy out there has worked over the past two years. As Charlie Sheen would say, we're all “winning” right now due to the stock market trending up as a whole.
The Good Times
Remember these days, because these are the good times. What we're experiencing right now is called a “bull market” — prices are going up and there seems to be no end in sight. This has happened before believe it or not — many times actually.
The market is cyclical and what goes up, must eventually come down. But even though there might be high volatility in the market getting from point A to point B, the general trend is up. That's why we invest in equities and that's why we're willing to take on the additional risk.
The term “market timing” refers to the attempt of buying or selling stocks in anticipation of future market price movements. So if you think stocks are going to take a dive, you would obviously sell a majority of your stocks and vice versa.
There is a whole class of investment advisers who specialize in market timing and they try to predict when a market will turn and when their clients should buy or sell equities. Sadly, many of these advisers suck at their job and fail quite often.
I know there are a handful who probably have a great track record of above-market returns but a majority do not. So by following one of these “market timers” not only do they have to pick the correct times to buy and sell, but you have to pick the correct adviser. And since many of the advisers charge outrageous fees on their funds (in the 1 to 2% range for a “good” adviser), your returns have to beat the market average plus fees if you do actually pick a winning adviser.
That sounds like a lot of “what ifs” to me and that's why I've never paid someone to try and time the market for me.
Downturns Will Happen Eventually
I think it's human tendency to want more of a good thing. Whether it's great food, great women, or great returns — if something feels good, our bodies tend to want more of it. I'm not going to lie: when I log in to my 401(k) account every week and see the returns I've been getting, I know I get pretty excited and want more. But I know that that greed is what causes people to lose a lot of money. When stocks are trending up, you should actually consider selling them and buying more bonds in order to maintain your allocation.
Selling your best-performing assets probably seems pretty counterintuitive, right? If I owned a racehorse and he was winning every race, why would I sell him and buy a bunch of donkeys? Well if you knew that racehorse was eventually going to break a leg and require thousands of dollars in surgeries, you might consider selling him, right?
The same thing is true in the market: stocks don't go up forever. Go look at a stock chart for a total market fund and tell me if that ride doesn't look a little bit bumpy.
Locking in Gains
Even though I'm against trying to time the market as a rule of thumb, there's one instance in which I think it could make sense. What if your portfolio has realized large or even huge gains in the past few years and you're content with the money you've made?
If your 401(k) has returned 15% halfway through the year, why not cash it all out and wait for the next downturn to come? Obviously you run the risk that the market could keep going up and you'd lose out on that gain, or maybe the market never comes back down (that's my worry and why I don't do it), but who cares if you have enough to meet your needs?
There's nothing wrong with making a decent chunk of money and not wanting more. It's hard to overcome our natural tendencies to want more of a good thing, but if you can, you may save yourself some money down the road.
A bull market is a good thing for everyone, just make sure that if you're going to try and time the market, you err on the side of caution and sell your stocks instead of trying to buy more.
What are your thoughts on trying to time the market?