Timing The Market Is Always a Bad Idea, Right?

December 4, 2012 8:42 AM

I know timing the market is stupid. My previous attempts at it have never worked out in my favor. My 401K is all index funds. However, with the possibility of Congress going over the 'Fiscal Cliff," it is a horrible idea to go all cash until they get it sorted out?

It seems to me the market still believes they will do something, and if they don't we could see a dramatic short term drop. Given that the downside of doing nothing is a potential 10-20% loss of value versus the upside being basically the status quo, I'm not seeing much to argue against going super conservative until a budget deal is in place.

It is matters, I'm 30% total market equity, 20% Intl equity, 20% REIT, 30% bonds at present. That is a little conservative for my age, but I like it that way.

posted by COD to work & money (23 answers total)

The market isn't sure what will happen. If you move all your money to cash and they reach a great deal, the market may shoot up.

Gamble with your gambling money. Invest with your 401K.
posted by alms at 8:44 AM on December 4, 2012 [5 favorites]

My GUESS is that the market will jump when things get fixed, and they pretty much HAVE to get fixed. I wouldn't even dream of cashing out a 401K.
posted by Slinga at 8:46 AM on December 4, 2012 [2 favorites]

If you're planning on retiring on, say, January 14th, then yeah, it might be a good idea to go super-conservative a bit early (but cash is rarely a good idea). But presuming based on your profile photo, you still have several decades before you need to worry about short-term instability.
posted by muddgirl at 8:56 AM on December 4, 2012 [5 favorites]

If it were a good idea, the smart money would have already done it, which would have lowered prices already.
posted by empath at 8:57 AM on December 4, 2012 [4 favorites]

Since your 401(k) is for long-term investing, and since you really can't predict what the market will ever do at any given time with certainty, you probably shouldn't concern yourself with the numerous things that "might" cause short-term losses. What you CAN do is make sure those funds you are invested in all have very low fees (total expense ratios) and no hidden expenses. If you are not in a self-directed brokerage account, you might be paying various expenses (commissions, fees, etc.) that you are not entirely aware of because they are so opaque.

Regarding your comment about your portfolio being conservative, I presume you are saying that because of 30% bonds, but I think that is somewhat mitigated (if not actually outweighed) by the 20% you have in REITs (and possibly the 20% you have in international stocks, depending on what kinds of markets those are in).
posted by Dansaman at 8:57 AM on December 4, 2012 [1 favorite]

And FWIW, the fiscal cliff isn't so much a cliff as a slope. It would take a while before any damaging effects happen, and a lot of it is pretty likely to get fixed retroactively (taxes on the middle class, especially).
posted by empath at 8:58 AM on December 4, 2012 [2 favorites]

Your question, "Timing the market is always a bad idea, right?" suggests that you already know that the answer is "Yes".
posted by dfriedman at 9:10 AM on December 4, 2012 [3 favorites]

I don't give specific financial advice unless I am very confident that I am right, and in those situations I tend to reserve my advice for close friends and people who have done favors for me in the past, since our free market is designed such that an informed investor benefits from other people's lack of information. However, as far as general advice, my overall strategy towards financial planning is to keep a store of liquid cash in my checking or money market account, and have a portfolio of well-researched and consistently reliable stocks that I keep an eye on. (Generally I buy 6 shares of each simply because it's easier to monitor that way, and because that way I maximize my benefit from both a 3-for-2 stock split as well as a 2-for-1.) Then I invest opportunistically, dumping my cash reserve into one of those stocks when I see the price dip (after having done some investigation into why there was a price drop to make sure it's not long-term). Attempting to invest counter to the market is a good strategy when it comes to regular market cycles, but it is risky when you are trying to predict the market's short-term reaction to specific events, since you are gambling not just that the event will or won't take place but also that other people have gambled on the wrong assumption. (Even if your guess is correct, you don't make money if most other people also gambled the same way you did, due to their buy and sell choices impacting the stock price.)
posted by wolfdreams01 at 9:13 AM on December 4, 2012

Your question, "Timing the market is always a bad idea, right?" suggests that you already know that the answer is "Yes".

Indeed. I had given no thought to doing anything with my IRA until last night, when my wife started asking about the Federal budget stuff and how it might impact us. I can't even remember the last time I logged in to check my balances prior to today. I typically re-balance once per year and mostly forget about it.
posted by COD at 9:29 AM on December 4, 2012

I went into the bank to convert my mutual fund rrsp into cash just a few days before the 2008 crash (got rattled by a spike in nervous chatter on an internet radio show I followed). The bank associate gave me the "timing the market is always a bad idea" and talked me into leaving the bulk of it alone. I regret that. I say do what you like but keep in mind that you'll need to jump back in when market confidence feels really eff'ed up.
posted by bonobothegreat at 9:41 AM on December 4, 2012

What the market does will depend largely on how, and when, they solve the problem.

If they don't have it solved by the end of the year, you can expect the market to plummet on Friday December 28th and Monday the 31st, and hard. One of the most likely "fixes" on the table would see the long term capital gains rate increased from its current 15% - Meaning a lot of big investors will liquidate to lock in at 15%. They may well buy right back in on January 2nd (NYSE has the 1st as a holiday), so that drop should only count as temporary.

Then when congress does fix things, the market should see a nice bump upward - Unless they goes for a transaction tax, in which case goodbye 13,000 until 2014.

However, in doing anything here you take a big risk of getting out at a low and back in at a high. Whatever does happen between January 1st and the actual solution (except the transaction tax as mentioned above) will smooth out after a few months as nothing more than a short-term hiccup.


Note also that a lot of companies have declared their yearly or 4th quarter dividends early, including more than a few special dividends, in anticipation of the qualified dividend rate going up. If you do decide to get out around mid-December, make sure that you haven't screwed yourself out of a huge payout just to dodge a self-correcting blip in the market.
posted by pla at 9:45 AM on December 4, 2012

empath: If it were a good idea, the smart money would have already done it, which would have lowered prices already.

"Smart money" can know that UberCoolTech is about to release the Next Big Thing, or that BioWonder Corp is unlikely to pass FDA trials given X Y & Z, but no one really knows what those cowardly, egomaniacal bullshit artists are going to agree on in Washington DC.

That being said, I'd hate to be out of the market when a (real, binding, not-stop-gap) decision is reached.

I believe in the Permanent Portfolio designed by Harry Browne. While I don't like the mutual funds named after his theory (because they underperform, and I believe their heresies deviations are why they do so), the method produces wonderful returns with almost never a down quarter - and only requires rebalancing once a year.

Almost too good to be true, but it's real, and has worked for decades. The PP is where I put my money if I have any uncertainty about the near term of the market!
posted by IAmBroom at 10:38 AM on December 4, 2012

bonobothegreat: I went into the bank to convert my mutual fund rrsp into cash just a few days before the 2008 crash (got rattled by a spike in nervous chatter on an internet radio show I followed). The bank associate gave me the "timing the market is always a bad idea" and talked me into leaving the bulk of it alone. I regret that. I say do what you like but keep in mind that you'll need to jump back in when market confidence feels really eff'ed up.

AGREED! I jumped out in June before the crash, and it was one of the best decisions of my life.

Market timing is possible, if you are not greedy nor nervous, and have an exit plan to guide you out of mistakes. But it's riskier than long-term sit-and-wait investment... which is riskier than long-term diversified sit-and-wait investment.
posted by IAmBroom at 10:41 AM on December 4, 2012

Really? I stayed in through 2008, and doubled down by buying up a bunch of cheap stuff in Nov-Dec 2008, and made out like a bandit.

I saw that as a once-in-a-generation opportunity. I otherwise don't try to time the market. I have no idea what will happen fiscal-cliff wise, but if the indices tumble, I'll probably buy more cheap stuff.
posted by everythings_interrelated at 11:06 AM on December 4, 2012 [4 favorites]

//I believe in the Permanent Portfolio designed by Harry Browne.//

I am familiar with that. In fact, I have an autographed copy of "How I Found Freedom..." at home. Just curious, are you using a fund to approximate holding gold...or do you actually have bullion stashed in a safety deposit box somewhere?
posted by COD at 11:08 AM on December 4, 2012

I would not go all cash; as others have said, we don't know what will happen. Perhaps some careful stop-loss orders would reassure you?
posted by epanalepsis at 12:47 PM on December 4, 2012

COD, I'm in IAU - the gold fund that (1) closely tracks gold's bullion price with (2) the lowest fees.

There are "gold" and precious metal funds out there that actually track the industry, including mining. That's not the same.

More generally, the PP fund I advocate is:
25% IAU
25% TLT
25% VTI (larger market exposure than the S&P 500)
25% SHY*

* but money has been so stable for so long that I'm currently in the other three equally instead, ready to throw SHY back into the mix if the dollar does budge. I know: I'm not technically following Harry Browne's PP. I'm a heretic, too. ;)
posted by IAmBroom at 1:36 PM on December 4, 2012

I don't understand the folks above who say they are sorry they didn't bail before or during the crash. Sure, my portfolio took a beating while I rode it down, but that also meant that for a couple of years I was "buying low" as my bi-monthly contributions were invested. Today the Dow isn't yet back to where it was before the crash, but my portfolio has come roaring back and is today worth much, much more than ever before.

Something else to consider when taking a long view to investing: when you retire, that doesn't mean that you'll be going to all cash or anything near it. If you have, say, 15 years to retirement, you'll also have 10-30 years IN retirement when you'll want to have some investments that will grow to help replace what you're withdrawing, whether that's bonds paying a decent dividend rate, or equities or a mix of the two. Which is to say, do you really think that current events like the political theater going on today will be anything but a tiny blip on the graph in 25-45 years?

I do time the market sometimes, but only with my fun money, because it's interesting, I learn from my mistakes and I feel terrific when I hit a mini-jackpot. Most recent example, when Yahoo hired Merissa Mayer from Google in July, I bought, because Yahoo has been shitty forever, and I think she's talented. When she had her first conference call in September, and reported better than expected earnings, bingo. Going forward, I'll monitor future performance and analyst recommendations, and sell or not according to my best lights.

I should add that when I'm fooling around with Yahoo or changing my 401k allocations, I never make a change of more than 5% compared to the total portfolio. If you've allocated your investments according to your risk comfort/aversion to volatility, there is no good reason that this will suddenly become wrong. (If you're not sleeping at night, you've taken on too much risk and should take gradual steps to rectify that.)

Finally, continue to rebalance annually. That's a best practice.
posted by Short Attention Sp at 4:32 PM on December 4, 2012 [1 favorite]

epanalepsis : I would not go all cash; as others have said, we don't know what will happen. Perhaps some careful stop-loss orders would reassure you?

HFT has made stop-loss (and really, any of the really awesomely useful order types) all but suicidal to use. You need to place them so far outside expectation that your orders either don't get triggered until you've already taken a bath; or they get triggered three times a day by "tasting" trades, leaving you wondering why the hell you traded at the lowest possible price of the day in an otherwise upward-trending market.

I used to use trailing limit stops religiously - They made timing the market (on the intraday scale) all but trivial, and you could easily squeeze an extra 5% out of the position. Then one day I started to notice what I describe above, I kept getting kicked out of good positions for reasons I couldn't explain.
posted by pla at 4:42 PM on December 4, 2012

Just leave it alone. If you don't ever stop looking at advice for investing you'll never finish reading what everyone and their grandmother's ideas for it are in any decent life span.

If you have some money you wanted to invest on the side... That is worth considering timing for.

However ... with the effects the debt ceiling passover caused awhile back, I highly doubt Congress and the President are willing to let a significant hurdle be run right into just because.

I had almost recovered back to original value when the debt ceiling fumble happened and then I proceeded to invest some savings I had on hand during the days the market tumbled down. I was early for the lowest mark, but it was still a successful buy in. I now have been recovered and more so since early this year.
posted by Bodrik at 9:00 PM on December 4, 2012

My 401k is managed by the provider. I pick the strategy (conservative, medium, risky) and they figure the rest out. They end up with a better return than index funds would end up with. Like Short Attention Sp said, I let mine ride and had some thrilling days where I "lost" thousands of dollars. However, six months later I was back to even while everyone else was complaining about losing their shirt. I have since more than doubled my money. By simply doing nothing.

So my advice is not to try to time the market yourself, but to pay someone to do it via mutual fund. They may not get perfect results, but they will do better than index funds.

If you must try doing this, only do it with half the money and see what happens.

(And yes, the fiscal cliff is probably already baked in. Remember, this plan was cooked up a year ago and everyone knows about it. The markets might go down if a deadline passes, but they might not- the markets might decide that letting it ride will be good for profits.)
posted by gjc at 6:00 AM on December 5, 2012

gjc:
If you must try doing this, only do it with half the money and see what happens.

This man is wise.
posted by IAmBroom at 1:44 PM on December 5, 2012

Sorry to keep posting here, but...

79% of fund managers don't beat the S&P.

Just because an "expert" manages your money doesn't make it any safer. Statistically, you would do better to leave it in an index fund and forget about it, than to trust an actively managed fund.

I can't find a link at the moment, but that also applies to funds that have historically done well - The percentage comes out almost identical when considering funds that have beaten the S&P over the past five years, which suggests they did so purely by luck, not any actual skill on the part of the fund manager.
posted by pla at 6:27 PM on December 5, 2012 [2 favorites]