Market timing requires two correct decisions

[Jerry1]

Ever heard the saying that timing the market requires two decisions to be correct - when to get out and when to get in.

Well, I did not learn this soon enough and have been terrible at my timing over the years. I vow this will be my last but am seeking advise on how to correct my last mistake.

Thinking the market would collapse after the election, I moved a bunch of my 401k to bonds and fixed. Of course, not only did I miss a lot of the market run up, I got the double hit from the bonds going down.

Now, to live to my vow, I need to get back into the market. I'm thinking about a 70/30 stock to bond allocation. The advise I'm asking is about how to do this. Just jump back in and rebalance my 401k all at one time or average it in over the course of a few months or a few years.

FWIW, my 401k is at about $580K and I have the following funds:
25% S&P index fund
25% 2010 target year retirement fund
25% Bonds
25% Fixed

The overall allocation is:
42% Bonds
33% Domestic Stock
10% Short Term
9% Unknown
4% Foreign Stock
2% Other

This comes from the asset class tab in my fidelity account.

Go ahead and have fun with me for being so smart and moving out of the market in late 2016 but I would appreciate some advice on how to rectify this.

Thank you.

 

[Sunset]

You are brave to own up to this silliness.

You failed to mention age, but from the size of your 401K , I'll guess far beyond 22, which is important for allocation.

You admit to having done this timing thing over the years, but perhaps this is the biggest error you made and this is why you now say it will be the last ?

I think, since you are the timing type, and you seem to have about 60 % bond things, that you put 5% of the bond things back into stock per month.

The other thought would be hold off for 2 months and see if the stock market collapses and then you can look brilliant.

 

[UnrealizedPotential]

Jerry , we have all made mistakes. If it was me, I would just put it all back in the market at once and be done with it. Consistent with your AA. No one knows what the stock market is going to do. That is why it is so important to find an asset allocation than lets you sleep at night.

 

[DrRoy]

I think that you put 5% of the bond things back into stock per month.

If it was me, I would just put it all back in the market at once and be done with it. Consistent with your AA.

How about you split the difference. Do 1/2 right away, then 5% on the first of every month up to your AA.

 

[audreyh1]

I think one thing that happens with markets is that when "everyone" thinks the markets are going to do X if Y happens, like with the elections, the markets often do the exact opposite. It really makes it impossible to speculate on any outcome no matter how clear the "facts" seem to be ahead of time. Knowing this is what helps me maintain my core retirement portfolio asset allocation, and simply rebalance after the fact rather than in anticipation of any major market moves.

Maintain the core. Speculate or be ultra conservative with new funds perhaps. Build buffers or whatever short-term cushion you might feel you need to weather a downdraft of a couple of years or so, but keep that core invested. It's your long-term investment. You've hopefully already picked an AA that will weather storms and recover in the long run, so leave it alone other than rebalancing.

 

[Jerry1]

You failed to mention age, but from the size of your 401K , I'll guess far beyond 22, which is important for allocation.

You admit to having done this timing thing over the years, but perhaps this is the biggest error you made and this is why you now say it will be the last ?

I'm 56 and that impacts my decision to not do this again. When I was younger, at least I had time to recover from mistakes. Now, I'm about 1 to 2 years from retirement. I'm already working part time.

I don't think this is the worse decision I ever made and even as a nervous investor, some of my timing was good. I was pretty lightly invested in 2008. Probably the biggest mistake I made was getting back in too late after that "win".

 

[pb4uski]

You could just do it (and don't look back)... and this is better in theory.

However, given that we are at new highs, I would figure how much you need to move and do 10% each month for 10 months ad adjust as needed.

Asset allocation is sort of like "the Force"... you just need to believe in it. I recall that back in 2008 or so my AA was literally screaming at me to sell bonds and buy stocks... but given the then current events I was like a deer in headlights and did nothing... if I had listened to my AA I could have had a Ferrari in the driveway today.

 

[LOL!]

The OP is in good company with some spectacularly wrong predictions noted by Larry Swedroe in his Lessons from 2016: Swedroe: Lessons From 2016, Part Two | ETF.com

http://www.etf.com/sections/index-investor-corner/swedroe-lessons-2016-part-three?nopaging=1

 

[COcheesehead]

I'm 56 and that impacts my decision to not do this again. When I was younger, at least I had time to recover from mistakes. Now, I'm about 1 to 2 years from retirement. I'm already working part time.

I don't think this is the worse decision I ever made and even as a nervous investor, some of my timing was good. I was pretty lightly invested in 2008. Probably the biggest mistake I made was getting back in too late after that "win".

70/30 sounds aggressive for 2 years from retirement.

 

[Totoro]

Now, to live to my vow, I need to get back into the market. I'm thinking about a 70/30 stock to bond allocation. The advise I'm asking is about how to do this. Just jump back in and rebalance my 401k all at one time or average it in over the course of a few months or a few years

First: write down your very own investment manifesto: what is your target allocation, your target behavior and why. Mechanical rules only. The objective is to protect yourself against emotion.

Since you had a mishap in that department, build up your defenses. In that sense I'd think a gradual phasing in is better, again mechanical, e.g. each quarter move x%. E.g. You are only allowed that one trade each quarter, regardless of what happens. Ideally no peeking in between Or get someone that has to give you 'permission' to trade. That person has your manifesto too. Put in a delay between decision and execution of say, one month.

In your case I'd spread out the readjustment over five years (!). Get used to the long term. Force yourself in that thinking mode.

If you know you'll readjust allocation again, put hard limits on it. E.g. never below 50% or above 70% equities, no matter what. That way you'll minimize a bit of regret vs. e.g. 100%.

Long story short: come up with a system that dampens decision making and judgment calls that are proven untrustworthy.

Optional: read "The Intelligent Investor". I really like the edition where Jason Zweig annotated Graham. It came out sometime after the dotcom bubble.

 

[Dawg52]

70/30 sounds aggressive for 2 years from retirement.

Me too, but I'm a wuss. If I were truly convinced 70/30 is the right AA for me, I would $$$ cost average in. Perhaps over 12-18 months.

 

[audreyh1]

70/30 sounds aggressive for 2 years from retirement.

And that might be part of the problem. If someone is having trouble sleeping at night, it's often because their overall equity allocation is too high and the volatility is unsettling.

Maybe work your way back to 50/50 and reevaluate.

 

[easysurfer]

Jerry,

The market still may collapse. But, who knows if and how soon.

Don't feel that bad though as I too thought the market would collapse this month. So I market timed (note the sarcasm ) too to hurry up and rebalanced at the start of the year . Actually, I rebalance at the start of the year regardless of what's happening.

I do admire your honesty. Sounds like you are a future DCA and rebalance type of person in the making.

I stick to percent allocations to take my emotions out of investing. That approach helps me sleep a lot better at night.

Easysurfer

 

[karen1972]

I'd be dollar cost averaging back in over the next 6-10 months. The market always seems to go up and down so your bound to get a few wins. Congrats on being honest.

I've been taking money off the top, preparing it for re-allocation, yes it is painful to see those same stock keep going up, but I know in the long run I'll be better off being more properly allocated and able to weather the storm longer term. Even in your 50s you have a 40+ years of potential ups/downs, this will look like a tiny blip when your 95.

 

[Chuckanut]

Thinking the market would collapse after the election, I moved a bunch of my 401k to bonds and fixed.

What fascinates me about this is why you thought the market would collapse?

Most people expected Ms. Clinton to win. Did you think that would be the cause of the collapse? Or did you correctly anticipate Mr. Trump's victory? (Brilliant! You out thunk the experts!) And think that would be the cause of the collapse?

Or did you just think the market would collapse after the election regardless of who won?

I am not being critical of you or your decision. I have made plenty of bad ones myself. But, since the result was unexpected for most of us, I am curious if that played a part in what you thought would happen?

Me? Since the Market is at high point, I would dollar cost average over a year or so in the hope that some corrections would pump up my long term returns. That is about as close to timing as I want to get.

 

[Lsbcal]

I'm 56 and that impacts my decision to not do this again. When I was younger, at least I had time to recover from mistakes. Now, I'm about 1 to 2 years from retirement. I'm already working part time.

I don't think this is the worse decision I ever made and even as a nervous investor, some of my timing was good. I was pretty lightly invested in 2008. Probably the biggest mistake I made was getting back in too late after that "win".

From your post you have maybe 37% in stocks as of now.

First you might do a careful analysis of your AA in retirement and how that would play out for spending i.e. FIRECalc and other tools. Now that you have your target AA for 1 to 2 years from now you can decide how to get there.

From what you have described, you are ruled a lot by your investment emotions. No shame in that, that's how I am too. To avoid my emotional self, I concentrate on lots of analysis and trying to set up a mechanical method that (at least) back tests well.

P.S. The night of the election I went to bed resolved to see a 5% to 10% portfolio hit. It was really a surprise to see equities go up.

 

[Jerry1]

What fascinates me about this is why you thought the market would collapse?

Most people expected Ms. Clinton to win. Did you think that would be the cause of the collapse? Or did you correctly anticipate Mr. Trump's victory? (Brilliant! You out thunk the experts!) And think that would be the cause of the collapse?

Or did you just think the market would collapse after the election regardless of who won?

I thought Clinton was going to walk into the White House. I guess I'm as good at predicting elections as I am at stock timing. However, that had nothing to do with it. I'd been anticipating a downturn in the market and thought investors were just propping things up to get their year end numbers and then in January, the bottom would fall out. The fact that Trump got elected surprised me, but I was thinking that would cause a melt down (so all seemed on track). I'm doubly shocked that it went up with him being elected. Again, nothing political here, just my incorrect assumptions at the time. Hence, it's time, as many have said, to get my emotions out of it.

I think I will take the DCA advice and select a target and work toward that over the course of the year.

As for the 70/30 AA, my 401K is not my entire portfolio. I'll look at all my accounts and get to a 60/40 AA over the course of the year. Until I shifted, my 401K was the most aggressive of my accounts. Now it's closer to mine and my wife's other accounts. So at this moment, I'm pretty low risk. I'm always struggling between my desire to not lose anything and my quest for a good couple years to supercharge my 401K. In doing so, I've done pretty well at not having a big loss, but I've also missed out on some major increases since 2008. I think I'd have been better off overall had I just stayed the course - as many of you know and subscribe to.

 

[foxfirev5]

Forget looking in the rear view mirror. Base your decisions on the market today. It's anybody's guess. However , sticking to a plan will help.
Personally I'm a little over 40% equity after being as high as 70% in the mid 90's. A couple of selling at the high's helped - sticking to the AA wouldn't have hurt that much. In your situation I would assess what I need and what my true risk profile is before making the leap.

 

[DrBrisket]

I thought Clinton was going to walk into the White House. I guess I'm as good at predicting elections as I am at stock timing. However, that had nothing to do with it. I'd been anticipating a downturn in the market and thought investors were just propping things up to get their year end numbers and then in January, the bottom would fall out. The fact that Trump got elected surprised me, but I was thinking that would cause a melt down (so all seemed on track). I'm doubly shocked that it went up with him being elected. Again, nothing political here, just my incorrect assumptions at the time. Hence, it's time, as many have said, to get my emotions out of it.

Even Nobel Laureates can't predict/time the markets. Paul Krugman published a NYT opinion piece the night of the last election stating that the markets would never recover from the freefall in market futures.

 

[H2ODude]

FWIW MY opinion is all that matters is what will be comfortable and sustainable for YOU going forward. What difference does it matter how you got to where you are now in projecting where you need to be (ignoring any tax issues)? I don't disagree with those who recommend DCA to get you to where you need to be IF that is what would make you most comfortable in staying the course. OTOH if there is some different AA that is what you decide is right for you (and you'd be comfortable in given all future outcomes; that's one heck of a condition ) I'm kinda one to say, let's get there now and be done with it. Yeah, there's a set of future occurences that can trash just about any course you pick, but meanwhile I'd just say get where you think you need to be.

As for doing dumb things, been there and gotten burned, like around 2000. I'd love to say I got out before 2009 and bought back in at the bottom. No, by that time in my life I rode it all the way down and haven't sold a thing since other than to do a bit of balancing (no market timing per se). I will admit to selling some in December thinking it had gone about as far as it could, and I'll be darned if I know what to do with the cash.

As for some of the comments on proper AA I'd just like to add that I think it makes a lot of difference what your situation is regarding spending and income other than portfolio (SS, pensions, etc). We probably have about 60/30 w 10 cash. However, if cut out travel we could easily get by on pension and SS that we haven't taken yet. Meanwhile we only take 3% of portfolio, so feel our 60/30 is OK. If I had no pension I'd be far less adventurous.

Good luck and don't beat yourself up. We can't all be Warren Buffett!

 

[kgtest]

Stick to an AA. And try to avoid the impulse of hitting the grand slam... that grand slam won't win the ballgame, good coaching, smart players and discipline will however!

If you are just as uneasy about dropping it all back in at once, DCA into a comfortable AA. I've made the same mistake you made, and learned from it.

My return was 9% last year and most people around me at work seem to think that was good. That was simply looking at prior years AA, then making sure at the end of the year my AA was the same number.

Buy and hold man, never sell!

 

[Hamlet]

Like the OP, I've been selling stocks gradually since the election. Unlike the OP, I'm still pretty confident that that will end up being the right decision.

Valuations are very high, corporate earnings are pretty stagnant, and we have potentially disastrous policies being considered in Washington.

I'm not big on market timing, but if the underlying valuations of stocks don't make sense to me, I'm not going to hold them just because people say you are supposed to. I avoided a lot of pain during the tech meltdown because I sold a lot of stocks when their valuations got beyond anything that made rational sense to me. I went into the Great Recession fully invested and bought all the way through, so I'm not Nostradamus, but I also am not one to panic just because something I bought goes down.

I'm down to about 75% stocks from about 90% before the election, so it's not like I will be unhappy if the market goes up and those sales end up looking foolish.