I’m in the process of consolidating all of my investment accounts at Fidelity. This isn’t because I think Fidelity is “the best”, but because I think they’re good and they’re certainly convenient. There’s a Fidelity “investor center” not far from my home. (In other words: I’m not endorsing Fidelity; I’m merely following my own advice to pick a good option instead of spending forever looking for the best.)
As I gather my various accounts under one roof, I’m also trying to set investment goals and to implement an asset allocation based on these goals. As I do this, though, I’m struggling with some emotional stuff. I’ve found that it’s one thing to write about smart investing, but it’s another thing to actually do it.
I’ve just learned a real-life lesson about market timing, for example. In general, short-term market timing doesn’t work — especially for amateur investors. If I asked you to tell me whether the stock market (or an individual stock) will rise or fall next Monday, you’d only be guessing. Investors shouldn’t make decisions based on guesses. Or wishful thinking.
Let me give you an example. I recently decided to sell a large stake in an S&P 500 index fund. In order to get my asset allocation correct, I wanted to transfer the money to bonds. But when it actually came time to sell the mutual fund, I couldn’t pull the trigger.
“What if it goes up?” I kept thinking. The market has been climbing over the past few months, and the fund was up 35% since March. 35%!! That’s a pretty good increase, but I wanted more. “Maybe I should wait until the market goes up another three or four percent,” I thought.
I held the index fund for an extra day. Then two. Then three. Each day, the market went down — and my fund followed with it.
“Ouch,” I thought. “I should have sold!” My fund had dropped 5% from the day I first decided to make the move. ”I guess I’d better just sell. Now I’m losing money that I could have safely on the bond side of my portfolio.”
So I sold.
That was early this week. As soon as I sold, the the market began to rise again. Up half a percent on one day, and the next, and then two percent yesterday.
“Holy cats!” I thought. “It’s up three percent since I sold it. I should have held on!”
This, my friends, is the problem with market timing. You can’t know what the market is going to do from day-to-day. Over the long term, the stock market has returned an average of about 10% per year. But that’s the long term. Over shorter spans, the market is volatile. It swings up and down. Over a period of days, its movements are basically random, unpredictable.
I made the decision to sell on June 12th, but I didn’t pull the trigger until June 22nd. In those ten days, my fund lost over 5% of its value. Now, in the three days since I’ve sold the fund, it’s risen 3%. Obviously, I managed to just about nail a worst-case scenario.
Market timing doesn’t always yield such poor results. But, in general, you’re better off basing decisions on your long-term goals and the market’s broad performance instead of trying to guess what your stock or mutual fund will do tomorrow.
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I’m a big believer in the long-term market timing while also a big critic of short-term market timing. One of the reasons why I favor long-term market timing is that it gets you out of the habit of paying attention to short-term developments. That stuff will drive you crazy. One of the reasons why I am not a fan of Passive Investing is that, after 30 years of it, most investors still pay far too much attention to short-term market developments. Promotion of the Passive Investing concept has not done the job of teaching us how to invest realistically and effectively.
Rob
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Andy Hough (#1) is absolutely correct. Everyone, JD especially, should read Mish’s blog post.
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I have been investing for years and have become quite good at it. (A natural if you will) What I have discovered is that good investing does take discipline. I set 10% training losses on all of my trades and I never buy at market open. I trade at the end of the day. Set stops, invest in solid companies, watch their management, and listen conference calls but take the forward statements with a grain of salt. When I buy a company I like to visit it if possible. This is how I made tons of money with Best Buy. If I like the look and feel as well as the product when I visit I also watch the cash registers for about an hour. Then I make my decision. Has yet to fail
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Sounds like you also need to move past the emotional urge to wait for a better deal when you’ve got a good one staring you in the face. I had this issue when considering a 5 percent mortgage rate and trying to decide if I should wait for it to go lower – one of the guys I work for, a farmer, put it in perspective when he said, should I take $8 wheat or wait for $10? (Wheat, historically, is in the $3-6 range but soared up into the teens last year.) Similarly, 35 percent is pretty good.
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Dude, you still made 30% right? Stop living in the past. That is better than losing 30%. You can’t live with should haves and what ifs. Be glad you made a profit. When you gamble, I mean invest, you are making the best, hopefully informed, decision that you can.
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I think it should be pointed out that the belief that stock indexes should increase in relative value over enough time is not ill founded. The whole point of business is to create more and more value. Wealth, over such an interval, is not a zero sum proposition.
For my purposes I’m not hoping to become fabulously rich with equity holdings. I’m hoping to own that asset class and enjoy its benefits while understanding its limitations.
Also, buying stocks is not saving it is investing and here’s why: the company in question needs a high stock price to be able to more effectively expand operations and use leverage. By buying their existing stock or any such new stock, you are facilitating that. It is exactly the same as loaning your brother money for a saw, etc.
I’m not pissing on non equity based strategies either. If someone just wants to ladder CDs, let them if that suits their goals, needs, and temperament.
I personally have no freaking idea what asset will return the most money between now and 30 years from now. I will plan accordingly.
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Snowballer, I tend to agree with you as far as a general outlook. The problem is that most of the last 25 years haven’t been typical. The mathematical rise in the market has produced valuations that are out of sync with historic norms, and we’re now dealing with the aftermath of a confidence problem.
A stock index trading at 30 or 35 times earnings, or even ratings from ratings agencies no longer seem credible. The recent 35% rise in the market over just 3 months isn’t in anyway normal either, especially against the economic background. How does an investor, especially a conservative one react to any of this?
I think that’s the real issue, not so much the wisdom of stock market investing in general or even how to go about it. Until this is sorted out/corrected/etc, any approach is high risk, even those that seem conservative relative to others. I guess what I’m saying is that this is no longer a market for unsophisticated investors or those who aren’t prepared for the possibility of losing most of their investment. It’s just the situation of the moment.
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But see that’s the thing, what P/E ratio IS acceptable?
Nobody can tell me.
Should not many factors go into consideration of each stock you are contemplating buying to determine what P/E ration will work?
A lot of people do exactly that. Problem is most people have neither the time or can’t afford the opportunity cost to really learn now especially considering the “experts” often don’t fare well themselves in such ventures. Lynch is famous for a reason (and it may even be just dumb luck).
Honestly if you can play pro ball or do brain surgery and get paid gobs of money, or do something else more mundane for small amounts of money, is it wrong to not desire to make sacrifices to gain an expertise you may never master?
Deciding what you’re comfortable with “losing” and then diversifying all holdings within that asset class is the best most people are honestly going to do, imho. If there really was some simple metric that determined when the best time to sell was, the entire stock market would collapse because everyone would buy and sell at the exact same time, all the time.
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If there really was some simple metric that determined when the best time to sell was, the entire stock market would collapse because everyone would buy and sell at the exact same time, all the time.
Benjamin Graham provided a simple metric in his book “Security Analysis (published in the 1930s),” Snowballer. That metric is P/E10 (the price of an index over the average of the last 10 years of its earnings). That metric has worked well since the day the stock market opened for business. Anyone who uses that metric to know when to increase and when to lower his stock allocation is able to retire at least five years sooner than would otherwise be possible. I have a calculator at my site that shows that anyone who switches today to using that metric can make up (over the next 30 years) the entire amount he lost in the stock crash by doing so. There is nothing the least bit complicated about investing effectively.
There’s one problem. The Stock-Selling Industry sees it as being in its benefit for middle-class investors to believe that it is always a good time to buy stocks. So it has directed hundreds of millions of dollars to marketing campaigns “teaching” us that “timing never works.” Do you think that the car-selling industry would not try the same thing if it could get away with it? Is there any industry that doesn’t want the public to become price indifferent in its decisions about buying its product?
You are right that if we all knew how stock investing worked, stocks would never again be insanely overvalued or insanely undervalued. If it were possible for us to share with each other what we have learned about how stock investing works in the real world, stocks would always go up about 6.5 percent real, the amount of gain justified by the productivity generated by the U.S. economy. You would never again see the insane gains you saw in the late 1990s. And you would never again see the sort of crash you saw last year.
Would that really be such a bad thing? I think it would be wonderful.
Rob
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Of course, if everyone “knew” when to sell, the smart money would sell just before that, leaving everyone else holding the bag. The market timing system you want to follow should never become well-known
“So it has directed hundreds of millions of dollars to marketing campaigns “teaching” us that “timing never works.””
Really? Almost everyone I know times the market. Where are all these massive marketing campaigns? Why is it every time I turn on a financial show, I see pundits talking about when and what to buy? Given all the bubbles and bursts, it seems that a lot of people aren’t getting the message to stop market timing.
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Given all the bubbles and bursts, it seems that a lot of people aren’t getting the message to stop market timing.
It’s emotional investing that causes all the bubbles and bursts, Lindsay.
Timing is paying attention to price. If you ignore price, you are investing emotionally. It’s giving in to our emotions that got us into this mess.
The idea that timing doesn’t work is the entire problem. Timing is not the problem, timing is the solution.
How else can we get stock prices down when they are too high except by timing?
There is nothing else — except suffering a huge crash. We were persuaded by the marketing campaign not to time. So we went the crash route instead. To what constructive purpose? Had we just sold stocks (timed the market) like we all knew we should have, there would have been no need for a crash and we would all be a lot better off today.
Rob
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“It’s emotional investing that causes all the bubbles and bursts, Lindsay.”
Emotions mean nothing to the market. It is buying and selling – ie following whatever market timing systems that people happen to be following that drives bubbles and bursts.
“How else can we get stock prices down when they are too high except by timing?”
That’s what we have said above. If everyone agrees on one specific timing system – then the burst happens all together. Just don’t be on vacation the day the timing system says to burst. And if you’re smarter, you should develop your own timing system that sells the day before everyone else.
For that matter, how did they get high in the first place? It wasn’t due to people ignoring the market – it was due to MORE money going in. Timing based on momentum, business outlooks etc.
Of course, in reality, people are using many different timing systems so it’s not so simple to tell when it’s going to pop. We called it almost to the day in 2000, and did quite well in 2008 too. Others obviously didn’t.
“We were persuaded by the marketing campaign not to time. So we went the crash route instead. ”
Maybe you were persuaded but that’s unusual. A look at inflows and outflows and where the money is going shows that most do time the market. We just don’t know how each person is making the decision.
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Lindsay, Rob. As mentioned previously, I’m not willing to allow another GRS thread to be derailed by your discussions. If you want to continue this, please take it to one of the two previous threads I’ve told you that you can have. I’m about ready to leave for a few hours, but if I come back and things have devolved into another circular argument, I will lock this post at a bare minimum.
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No doubt. If long term (not buy and hold necessarily) investing was as fun as watching the ticker all day long, everybody would be making money. When investing is reduced to gambling, that’s when it needs to be stopped.
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Rob,
If you’re ready to discuss this seriously, I suggest we do it here, as J.D. requested:
http://www.getrichslowly.org/blog/2009/06/02/the-lazy-way-to-investment-success/
As J.D. said to you at comment 437: “Actually, Rob, I do. You won’t answer my questions. You refuse to carry on a conversation. You demand that people engage you, but when they do, you refuse to talk. That’s on nobody but you.”
There are still many open questions for you in that thread. Let’s go there!
Another place we can talk is:
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl
Unlike here, discussion of your investing ideas is considered on-topic there, and unlike your blog, comments that disagree with you or ask you detailed questions are allowed to appear on that website.
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Could please tell us how you are timing the market?
Your thinking or tools used.
Or did you just get a feeling you needed to sell?
Do you look at stock charts?
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Rob, Lindsay — another option is to take it to the GRS forums. I’d actually recommend that route in the future. It could be a great way to carry on the debate without de-railing new threads.
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Please feel free to invest however you please, Lindsay. It’s none of my business.
Rob
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“Could please tell us how you are timing the market?
Your thinking or tools used.
Or did you just get a feeling you needed to sell?
Do you look at stock charts?”
See that’s just what gets me about Mr. B. His idea would work, it’s just sell when prices are high and buy in again when they’re low. The problem is his only justification is he refers to P/E ratio of the index (averaged over last X years), which sounds good because it’s a real accounting concept. Then he just gets real vague.
I’d actually like to understand his ideas better because a better alternative to passive strategies would be wonderful. But it seems nowhere on his site does he actually, in a marketable and useful way, explain step by step how to do this.
From his comment above I have gathered he seems to think we should sell when P/E reaches some number. That’s fine and good but the problem with P/E as a metric is that while that certainly is simple, he’s arguing against simplicity!
Using a single ratio to quantify a non objective concept like value is very narrow thinking, for lack of a better word. You might as well pick cash flows or equity to book value or some other ratio that gives you some idea how things are faring but doesn’t tell the whole story.
The other problem is that if P/E is your ratio, even if you average it over 10 years, yeah you get a pretty stable denominator that only changes a little bit once in a while (whenever you update it), but the numerator changes every single day. So when do you act?
Also, how is any value for P/E at which you should sell anything more than a rule of thumb?
What’s more, P/E today or of the past means, well, nothing. We have no way of knowing what P/E is going to be in the future. It wouldn’t take much fluctuation for any rule of thumb you figure out to not work any more.
I think I’m being very fair and honest to Bennett by stating if you did pick the right P/E value his idea would work wonderfully. I simply do not believe you can objectively pick such a value however, and he’s not demonstrated how.
I suspect from what I’ve read Mr. Bennett’s real product are his web pages and blog posts and such, and he’s hoping the idea will catch on so he can be a famous investment guru and sell all those books he purportedly has paid to store. His wish for an objective stock market is commendable but impossible, as no other product on earth is priced completely objective either. There’s a premium on nearly everything that’s just based solely on the irrational degree to which it is desired.
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Yeah, that is market following, not timing.
* “Oh, the market has been good. I’m staying in.”
* “Oh, the market has been bad. I’m getting out.”
* “Oh, the market has been good. I got out too early.”
All of that is basing your decision on what is already past. Market timing is something completely different. Most funds can show that their fund return has outperformed the people who own their fund! This is because people buy in after it has performed well (and will probably underperform now), and sell after it has underperformed (and will probably perform better now). Thus most people “buy high and sell low”… That is market chasing, and that is what you (and most people) did, J.D.
Market Timing is different, involves understanding charts and is not for amateurs. You can make money at this, but it is trading, not investing, and is like another job. You have to take it seriously, show up, and learn a lot…
It is also part of a strategy, not the only thing you need to do. Fundamental research to pick good stocks, market timing to know when to get in, money management and risk control, and stops to limit losses – these together make a solid trading strategy.
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Blindly holding long term isn’t always the answer either. I have held a few mutual funds for about ten years. All from high quality companies like Vanguard. If holding long was the sure answer, I would be in the black by about ten percent. Truth be told, on average they are worth less today then when I bought into them. I’d be significantly better off if at the time ten years ago I sunk all the money in CDs. Holding long may to some extent still be good advice, but the prevalence of online trading may have thrown a wrench in that philosophy because it is now much easier to day trade, short sale, and react quickly to emotions.
Also I do not think buying stocks is really an investment anymore. Investment implies you are supporting a company financially in hopes of a financial return. It can’t be an investment when the system allows others to easily borrow your stocks and short sale them essentially rooting for your investment to fail. News networks like CNN and personalities like Crammer are manipulating stocks either intentionally or unintentionally as well. Years ago, you had to call a broker up, pay a heft commission to buy or sell (at hundred bucks a pop to buy or sell, most people couldn’t do that on a daily basis and make money), media coverage was low, and accordingly prices weren’t subject to as much fluctuation. Today, so called investing is more like going to the race track.
If you are buying individual stocks just pulling the trigger and holding may be bad advice as well. Some well know companies that a few years ago where worth close to two hundred dollars a share are now under five. Bell weather stocks like Ford Motor company are barely keeping their heads above water. Seemingly one time unbeatable retailers like K-Marts stocks were liquidated when the company filed bankruptcy.
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@miles (myself)
By looking this morning at 10:45 i can see that yes the market is up an overall 1%, so if you had invested in the ivv or sdy you’d have about 1% more cash, you could try doing this over the next couple of weekends, market timing is about taking time to notice the broad trends. Maybe 1% doesn’t sound like a lot, but if you throw enough cash into the market 10l – 20k you’ll be up a nice pretty penny, over the year you could probably manage to pull off a 10% increase doing this.
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@clint
I completely agree that ladders are the best way to go about investing, it is just hard when you aren’t using quite enough capitol, 10-20k because the fees would kill you, unless you choose a brokerage with little to no fees.
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I try to remind myself each day that I am an investor and not a speculator. I’ve considered being a speculator, but the track record fo those who try it is horrible. Sure, a few hit a home run once in awhile, but most research and stats show that active investing rarely beats the market index.
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Dollar cost averaging is the obvious answer to market volatility. Just remember it helps get you the average price over a period of time, not the best price.
I think the point that most of us are “savers” who are looking for an investment for our savings is a good one. “Buy and hold” is pretty much the only option available. We can change what we hold, but there are no riskless investments. We will eventually reach a point where we sell, but it will likely be determined by what our life that demands a use for the money, not an evaluation of the stock price.
The bottom line on retirement is that we are buyers while we are working and going to be sellers once we retire. No matter what the market is doing. What we can do is slowly shift our investment mix so that it is more stable the closer we get to retirement when we will become sellers.
Our goal now is usually to preserve what we saved, keep up with inflation and make a little extra. It is that “little extra” where we become gamblers. Unless you are investing solely based on the dividends stocks pay, you are speculating – aka gambling – the price of your stock will go up.
Every proxy says past performance is not a promise of future returns. Everyone who puts money in the market should take that statement to heart. The Maddoff’s of the world are the only people who can consistently guarantee a return based on market speculation. The rest of the winners are just on a lucky streak.
Guys like Buffet make their money by investing in companies with a plan to make them profitable. Others are successful pirates, investing in companies and looting them for a quick profit. Many are unsuccessful at both those games but they disappear off the radar screen pretty fast. And none of them, successful or not, have anything to do with the typical speculator/investor in the stock market.
I don’t think bad market timing is just bad luck. Like JD, we are more likely to choose the worst time than the best time. The emotional drives are almost all counterproductive. We tend to hang onto stocks that are raising and sell stocks when they are falling, usually at the very bottom because we don’t want to lose any more money. There are plenty of psychological studies that explain this as normal human behavior.
I think the biggest problem for people who follow their account balances on a regular basis is to remember that these are current valuations of assets, not real money. The only prices that matter are the ones you pay when you buy and the ones you get on selling. If you are buying stock for your retirement, lower prices are your friend. Its only when you are retired and selling that you want higher prices.
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As someone who has timed the markets for years, I can agree with you that most people CAN’T time the market…at least with most of the technical tools out there.
Most tools are based on PRICE, not TIME. To get timing right, I use time cycles. There is a 19 day, 11 day and 6.5 day cycle that continue to NAIL shorter term moves in the markets like clockwork,and have been for YEARS.
But I’ve been at it a long time, and know how to read the nuances of slightly changing timeframes within those cycles.
It’s a great study, and one I would recommend to every trader.
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