Dirty market timing and cash

[cardude]

http://boards.fool.com/navigating-for-the-next-decade-30829203.aspx?sort=whole

This is from the Motley Fool Berkshire board. The consensus on the board seems to be that the overall market is very overvalued, so if you hold a broad market mutual fund you may want to do some market timing, selling the overall market and increase cash, then buying back in when the market is more reasonably valued.

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time to mitigate the risk 10-20 years of flat overall market returns.

 

[RenoJay]

At the nadir of the financial crisis, I doubled down and had about 86% of my total net worth in equities and about 14% in cash. I believed in my head I was doing the right thing, but my stomach was in knots and I had to take anti-anxiety meds for a couple months. (In hindsight I DID the right thing, but it wasn't worth the stress.) So as the market recovered, I moved toward an asset allocation I felt I could live with for life, come early retirement or anything else. I now have about 50% of my net worth in equities and the rest is diversified among CDs, private lending, real estate, cash, etc. I'll just ride it out at this point. Though the market is probably over-valued, that doesn't mean it can't get more over-valued, like in the late 90's.

On another note, since you brought up BRK, I sold the vast majority of it a few months ago. The reasoning is that Buffett himself has stated that BRK will not outperform the S&P by much going forward due to its size, and Buffett himself is getting up there in years and not likely to drive the train for that much longer. I have no idea who these guys Todd and Ted are that are being groomed to take over, but I do not believe for a second they'll have the cache, connections, intestinal fortitude, etc. to be the next Buffetts. In fact, when Buffett started, he didn't have that much pressure. He dealt with a few private investors who knew and trusted him. For Todd and Ted, the bar is much higher. They'll be inheriting the investment portfolio of a publicly-traded behemoth and every move they make will be scrutinized with a WWBD (what would Buffett do?) mentality. I think I'll sit that one out and just remain 50% in index funds, collect my dividends, and ride the market's ups and downs.

 

[photoguy]

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time to mitigate the risk 10-20 years of flat overall market returns.

So are you selling (or have sold) all your equities?

 

[REWahoo]

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time..

It's that "might be" qualifier that always gets me when it comes to market timing - along with the historical inability to accurately predict what markets will do in the future.

 

[Midpack]

At any given time or valuation, you can find seemingly convincing articles recommending buying or selling equities, especially now in the Internet age - the number of "experts" has grown exponentially! Some will be right, some will be wrong and both due to chance as much as anything. Not that it matters, but valuations were a lot higher going into the dotcom downturn, and there were lots of experts still recommending getting in.

If you're a long term investor you know the rewards of ignoring this kind of "advice" has paid off handsomely - in the long run. If you're a short term investor, good luck timing the market. The odds of success have been poor, even for pros much less amateurs like most here (self included).

Best of luck whatever you decide, it's your money and your financial future...

 

[W2R]

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time to mitigate the risk 10-20 years of flat overall market returns.

Just this once? Market timing can be a horrible strategy for many of us, even just once. I know it doesn't work for me at all. My crystal ball is so unreliable.

True rebalancing (only according to specific criteria in a written financial plan) does make sense to me but I already did that in May, and do not need to do it again quite yet. [Edited to add: actually, I just checked and my planned equity allocation of 45% is now 44.93%. That's about as right on as it gets.]

If/when my AA once again gets out of balance enough to exceed those criteria, believe me, I'll follow your advice.

 

[LOL!]

I have to write that another dirty market timing newsletter writer does not agree. See e.g. http://www.early-retirement.org/forums/f44/lol-s-market-timing-newsletter-57042-7.html for the latest.

 

[W2R]

I have to write that another dirty market timing newsletter writer does not agree. See e.g. http://www.early-retirement.org/forums/f44/lol-s-market-timing-newsletter-57042-7.html for the latest.

Yes, be aware that "LOL!" responds to many threads that mention market timing, by citing the above link to his thread instead. You can also find many other threads on market timing by using our search functions.

 

[frayne]

My investment philosophy is pretty much set and forget. IMHO, market timing is foolish unless you have a very well calibrated crystal ball. Just my two cents.

 

[haha]

TMF: Navigating for the next decade / Berkshire Hathaway

This is from the Motley Fool Berkshire board. The consensus on the board seems to be that the overall market is very overvalued, so if you hold a broad market mutual fund you may want to do some market timing, selling the overall market and increase cash, then buying back in when the market is more reasonably valued.

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time to mitigate the risk 10-20 years of flat overall market returns.

This is about like asking about gay marriage at the Southern Baptist Convention. You can be pretty sure what you will hear.

Ha

 

[Lsbcal]

TMF: Navigating for the next decade / Berkshire Hathaway

This is from the Motley Fool Berkshire board. The consensus on the board seems to be that the overall market is very overvalued, so if you hold a broad market mutual fund you may want to do some market timing, selling the overall market and increase cash, then buying back in when the market is more reasonably valued.

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time to mitigate the risk 10-20 years of flat overall market returns.

I'm not at all against market timing, but since when is the "consensus" right? If it were so simple one would just tally the boards quarterly and then go with the flow.

Have you tried doing a backtest of the consensus opinions? Did they get the 2008 call correct? How about the 2000 call? Any false calls in the last 10 years or so? That would be about the max time span to study internet boards I would imagine.

I have seen people talk about market timing being easy to develop looking backwards but warning about using it going forwards. This is bunk. Most people (almost 100% I would guess) making that statement have never done any studies and are biased against MT.

 

[sengsational]

I don't try to time the market, so pretty much ignored it, but the last Vanguard newsletter had a P/E chart on the back that said we were currently below the typical level. I think they said 20 was average, at we're at about 16. It's been much higher for some pretty long durations. So I question the collective wisdom on the fool board.

 

[haha]

I don't try to time the market, so pretty much ignored it, but the last Vanguard newsletter had a P/E chart on the back that said we were currently below the typical level. I think they said 20 was average, at we're at about 16. It's been much higher for some pretty long durations. So I question the collective wisdom on the fool board.

Does Vanguard have any incentive to keep clients invested? Does Vanguard have any incentive to encourage clients to withdraw their funds?

I know Vanguardliness is next to godliness, but still..

Ha

 

[NW-Bound]

The problem is whether we use the recent average P/E of the last 3 decades as the yardstick, or the really long-term P/E average over the last 140 years.

See: HULBERT ON INVESTING: P/E Ratios Aren't Always What They Seem - WSJ.com.

I do not intend to sell out of the market, but as I am trimming some stock positions due to their very specific and individual conditions, I am a bit reluctant to redeploy that cash to buy something else. So, my cash hoard has been slowly climbing.

 

[LakeTravis]

I wouldn't go so far to say that's the "consensus of the board". In fact, there is a post that references another thread in which the author proposes we are entering a long term bull market and those who were all in during/after 2009 shouldn't make a move at all.

I predict it'll either rain tomorrow or it won't.

 

[sengsational]

Does Vanguard have any incentive to keep clients invested? Does Vanguard have any incentive to encourage clients to withdraw their funds?

I know Vanguardliness is next to godliness, but still..

Yep, I agree Mr. Ha. There are spin forces at work there. I thought you couldn't argue with P/E, though, then I saw Mr. NW's post, hehe.

 

[Chuckanut]

I understand that most folks who own index funds don't want to try to time the market, but it might be worth doing this time to mitigate the risk 10-20 years of flat overall market returns.

I think that is what most of us are doing when we do our yearly/quarterly or whatever re-balancing act. That seems to be the safest market timing tool I know of. At most I might re-balance early. Nobody ever went broke taking a profit.

 

[foxfirev5]

My simple mind has me holding true to my 45/40/15 equity/bond/cash allocation. The cash may increase a little as I approach ER and want enough to bridge from 58 or so to age 62.

 

[karluk]

People like me, who rebalance multiple times per year, have already sold a lot of equities and bought a lot of bonds, simply to keep our asset allocations in line with targets. That's an inevitable by-product of an ~20% rise in stocks in the past six months combined with the current weak bond market. I see no compelling reason to go beyond what I've already done, which would involve reducing my stock allocation below my target level. Doing so would put me at risk of eventually needing to repurchase stocks at a higher price in order to get back to my target. It's that sort of catastrophic mistake that gives market timing such a poor reputation.

 

[cardude]

So are you selling (or have sold) all your equities?

No, I am not selling all my equities. I am not invested in a market index fund but instead in various companies that are not currently (IMO) overvalued. That post I referenced actually talks about NOT going to cash if you are invested in reasonably valued companies that will be able to grow earnings over time. I did sell all of the stock in an IRA account that I thought had gotten overvalued, but that was only 5% of my portfolio. The only way I can see going to 40-50% cash is if one of my bigger holdings hits my "overvalued" trigger.

My post was meant to be more of a thought experiment on what could happen and how we will deal with it rather than an actual prediction of what might hapoen. I would like to try to be ready for whatever the market throws me. For instance, how would your portfilio hold up as you draw down on it if the overall market goes sideways for 20 years? 30 years?

 

[Lsbcal]

...(snip)...
My post was meant to be more of a thought experiment on what could happen and how we will deal with it rather than an actual prediction of what might hapoen. I would like to try to be ready for whatever the market throws me. For instance, how would your portfilio hold up as you draw down on it if the overall market goes sideways for 20 years? 30 years?

I have only modeled what has happened in the past since about 1925. I don't think just sideways is in the cards for so long. Most likely a major decline followed by a major rise (or several of these things) that then takes us when looking backwards into a zero gain market. I think I have that covered and it does involve some asset shifts.

I modeled being a Japanese investor using the Nikkei (buy-hold CAGR= -4.6% from 1984 thru 2009) with a possible shift to bonds and/or the EAFE and it came out just OK, not great. I would not eat dog food at least. Worked but we really don't know do we? Makes life a little spicey.

 

[cardude]

This is about like asking about gay marriage at the Southern Baptist Convention. You can be pretty sure what you will hear.

Ha

Yeah, I didn't think it would be all that popular. I guess my point was to get people thinking about what would hapoen to a portfolio during draw down if these broad market index funds stayed flat for 20 years and bond funds did the same. I would rather be invested in cash and a handful of companies I thought could weather the storm and even prosper during a long sideways market. Use the cash to pick up bargins along the way. Just a different approach, but probably not the best method for most.

 

[cardude]

I'm not at all against market timing, but since when is the "consensus" right? If it were so simple one would just tally the boards quarterly and then go with the flow.

Have you tried doing a backtest of the consensus opinions? Did they get the 2008 call correct? How about the 2000 call? Any false calls in the last 10 years or so? That would be about the max time span to study internet boards I would imagine.

I have seen people talk about market timing being easy to develop looking backwards but warning about using it going forwards. This is bunk. Most people (almost 100% I would guess) making that statement have never done any studies and are biased against MT.

Yeah, consesus was probably not the best word-- just quite a few sharp people taking some money off the table.

 

[LOL!]

If stock market and bonds stayed flat for 20 years, this would pretty much mean inflation was zero or we were in a deflationary period. As such, I would not need our portfolio to go up at all while withdrawing. The reason is that the 4% rule would still work for 25 years and at 3% withdrawals that would be 33 years. By definition.

For example, elderly Japanese investors are doing great! Their expenses have gone down even if their portfolio haven't gone anywhere.

 

[Chuckanut]

I guess my point was to get people thinking about what would hapoen to a portfolio during draw down if these broad market index funds stayed flat for 20 years and bond funds did the same.

But, how do we define 'flat'? I doubt if any of us would think the stock and bond markets would never vary and open and close each day at exactly the same value day, after day, after day, after day for 20+ years. More likely the market would go up and down, perhaps as much as 10%, but always returning to about the same point within months or maybe a year or two. The hills might not be very high and the valleys not very deep, but they would be there.

If my above scenario is correct, would not that allow our re-balancing tool to take advantage of those ups and downs in the long run to return more than what a perfectly flat market would give us? Add in dividends, and perhaps a 4%return might not be impossible. I imagine the academics have already modeled this. Of course, maybe I am all wrong. My 2¢.