Market Timing or Risk Management?

[daylatedollarshort]

We've had some talk lately about selling bond funds this year due to the Fed's plans to raise interest rates. Some call it market timing. I came across this interview with Bill Bengen, father of the 4% rule, and his take on that.

https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

"[Investech is] recommending that you should be at about 55% of your normal allocation of stocks. So if you normally allocate a 60%/40% portfolio, you should reduce stocks to 33%.

I’m personally lower than that because I’m more conservative.

Q: Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.....I would cut your bond allocation at least in half."

 

[W2R]

We've had some talk lately about selling bond funds this year due to the Fed's plans to raise interest rates. Some call it market timing. I came across this interview with Bill Bengen, father of the 4% rule, and his take on that.

https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

"[Investech is] recommending that you should be at about 55% of your normal allocation of stocks. So if you normally allocate a 60%/40% portfolio, you should reduce stocks to 33%.

I’m personally lower than that because I’m more conservative.

Q: Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.....I would cut your bond allocation at least in half."

My stock allocation is now at 48%.

In my case, I tended to lean towards risk management when initially setting up my portfolio and asset allocation years ago. Risk management now would depend on the (true or untrue) reports that I happen to hear about what the market is doing or may do in the future. I do not plan to implement that investment philosophy. Staying firm worked well for me in 2008-2009, so that is my plan.

Who knows? I might get clobbered. If so, I've got SS and my mini-pension, so I guess I'll just LBYM and wait it out. But so far, all seems fine.

 

[njhowie]

Q: Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.....I would cut your bond allocation at least in half."

So he's defining what market timing is? Well, his definition is clearly a unique one. If I google for "market timing definition", not one of the results come back with anything resembling his personal definition.

It's little different than when numerous examples are presented to Fama showing his EMH doesn't hold, and he calls those "anomalies".

Of course it's market timing.

 

[big-papa]

We've had some talk lately about selling bond funds this year due to the Fed's plans to raise interest rates. Some call it market timing. I came across this interview with Bill Bengen, father of the 4% rule, and his take on that.

https://www.thinkadvisor.com/2022/0...s-4-rule-says-to-cut-stock-and-bond-holdings/

"[Investech is] recommending that you should be at about 55% of your normal allocation of stocks. So if you normally allocate a 60%/40% portfolio, you should reduce stocks to 33%.

I’m personally lower than that because I’m more conservative.

Q: Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.....I would cut your bond allocation at least in half."

Investopedia's definition of Market Timing:
"Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods."

From the Cambridge Dictionary:
"the methods that investors use to decide when to buy or sell shares, by considering whether prices will increase or fall in the future"

From the Corporate Finance Institute:
"Market timing refers to an investing strategy through which a market participant makes buying or selling decisions by predicting the price movements of a financial asset in the future. "

There's no requirement in any of these definitions that selling everything at the top and buying everything at the bottom is the definition of market timing. For sure, attempting to do so is a form of market timing, but it isn't the only form of market timing.

If it quacks like a duck...

cheers,
Big-Papa

 

[Bigdawg]

Investopedia's definition of Market Timing:
"Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods."

From the Cambridge Dictionary:
"the methods that investors use to decide when to buy or sell shares, by considering whether prices will increase or fall in the future"

From the Corporate Finance Institute:
"Market timing refers to an investing strategy through which a market participant makes buying or selling decisions by predicting the price movements of a financial asset in the future. "

Bolded by me above. Can we conclude that anytime a person buys a stock they are market timing? Who would buy a stock thinking it would go down? Unless you are shorting. Right now with the market down 20% or so I am looking to increase equities. My thought process is that the market always goes higer. So if I buy now, there is a 20% profit baked in. That 20% may take a few years because we are in a weird spot as a global economy right now. I am timing the market. Oh well. Still doing it basically DCA.

 

[arcyallen]

I wouldn't worry too much about the label "market timing" and instead think about what you're doing and why. If you're making changes based on what you think is going to happen, historically you'll more likely than not make a change you'll regret. Investor behavior is your #1 obstacle in investing. As a herd we love to make the wrong move at the wrong time and feel smart doing it in the moment. Generally I'd find an allocation that works for you (and know why it works for you) and then stick with it for the reasons you originally established.

 

[big-papa]

Bolded by me above. Can we conclude that anytime a person buys a stock they are market timing? Who would buy a stock thinking it would go down? Unless you are shorting. Right now with the market down 20% or so I am looking to increase equities. My thought process is that the market always goes higer. So if I buy now, there is a 20% profit baked in. That 20% may take a few years because we are in a weird spot as a global economy right now. I am timing the market. Oh well. Still doing it basically DCA.

This sort of thing comes up on the bogleheads forum pretty often. I've seen pretty much everything, including buy-and-hold get the label at one time or another. I think some people find joy by labelling others as market timers. Whatever.


I invest in the market because I have an expectation that over my investing lifetime that the market will go up. Otherwise I wouldn't do it. The thing is, I have no idea by how much it will go up and I have no idea what sort of short term or extended downturns or irrational exuberance might happen along the way or when they might happen. But the thing is I don't change my AA because of what I think might happen going forward, though I may adjust my AA back to my target if it gets too far out of whack based on what has already happened - i.e. Rebalancing. Though I've seen rebalancing get the label "market timing" as well. And I continue to plow money into my savings as long as I'm in accumulation mode because the amount of savings has such a large impact anyway.

Cheers,
Big-Papa

 

[ERD50]

.... So if you normally allocate a 60%/40% portfolio, you should reduce stocks to 33%.
...

Q: Some would call InvesTech’s approach market timing. Thoughts?

This isn’t market timing but risk management. Market timing is when you try to sell everything at the top and buy everything at the bottom. No one in creation can do that reliably.....I would cut your bond allocation at least in half."

"some" would call it market timing? It is market timing, it's the very definition of market timing. Going from 60/40 to 33/67 is market timing, period. I picture him looking straight into the camera, non-blinking, and saying sternly "I did not have a market timing relationship with that stock index, the S&P 500."

He can't just make up his own definition, and then say his definition is the definitive one. Find one other reputable source that claims it's only market timing if you "you try to sell everything at the top and buy everything at the bottom.". Among market timer practitioners, I think very few go to that extreme.

Question for you: Since you mention this comes from "Bill Bengen, father of the 4% rule, ", is this some sort of sideways attempt to discredit the FIRECalc reporting approach? You seem to be really hung up on what you see as inconsistencies in it. But a practitioner changing his stripes doesn't invalidate the approach. Two + two is still four. Thoughts?

-ERD50

 

[MichaelB]

What's in a name? That which we call a rose
By any other name would smell as sweet

 

[Murf2]

Maybe it could be called “Market Part Timing” since he says to sell roughly half your assets. [emoji106]

 

[Montecfo]

Jumping out of the way to avoid getting hit by a bus?

I call it wise!

Why agonize over thinking ot might be market timing? We may have gotten the clearest signal that higher rates were a virtual certainty in history.

 

[Lakedog]

Jumping out of the way to avoid getting hit by a bus?

I call it wise!

Why agonize over thinking ot might be market timing? We may have gotten the clearest signal that higher rates were a virtual certainty in history.

+1

Nothing wrong with a little risk management (or market timing) -- doesn't really matter what you call it.

 

[njhowie]

+1

Nothing wrong with a little risk management (or market timing) -- doesn't really matter what you call it.

Oh please. Had this all been posted a year ago, you know all these folks saying "Oh, maybe it's market timing, who cares what it's called" would have been skewered.

 

[ERD50]

Jumping out of the way to avoid getting hit by a bus?

I call it wise!

Why agonize over thinking ot might be market timing? We may have gotten the clearest signal that higher rates were a virtual certainty in history.

Not if you jump into the path of a freight train!

There's no "agonizing". Words have meanings, it's how we communicate, it's simple. If "a word means whatever I say it means", we are off into "Wonderland" and there is no useful exchange of ideas.

-ERD50

 

[NW-Bound]

I am a market timer. Have always been. And I pick stocks too, heh heh heh...

My stock AA is still 75%. However, the composition is nothing like the S&P. It has leaned heavily towards energy and natural resource sectors, because these have grown and I have not sold off much.

Never had Tesla, Amazon, Google, Netflix, etc... These are a big part of the S&P 500. Never had much bond either, though I have always had quite a bit of I bonds (I called them cash, same as my Stable Value Fund).

And frankly, I do not mind what other people do with their money. Only my money matters to me.

 

[Montecfo]

Not if you jump into the path of a freight train!

There's no "agonizing". Words have meanings, it's how we communicate, it's simple. If "a word means whatever I say it means", we are off into "Wonderland" and there is no useful exchange of ideas.

-ERD50

I think agonizing is the right word if you simply look at the history of that label on this site. But I could have said hand-wringing or worrying I suppose.

And heck, this thread was started on that very topic...more evidence.

As far as strawmen, I don't fear them.

 

[razztazz]

Investopedia's definition of Market Timing:
"Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods."

From the Cambridge Dictionary:
"the methods that investors use to decide when to buy or sell shares, by considering whether prices will increase or fall in the future"

From the Corporate Finance Institute:
"Market timing refers to an investing strategy through which a market participant makes buying or selling decisions by predicting the price movements of a financial asset in the future. "

There's no requirement in any of these definitions that selling everything at the top and buying everything at the bottom is the definition of market timing. For sure, attempting to do so is a form of market timing, but it isn't the only form of market timing.

If it quacks like a duck...heers,Big-Papa

IOW, Buy & Hold + re-balancing. All market timing. They all use the same data to predict the same things. And yes, it's all a prediction game. The only difference is the ones who (claim to) buy and hold and rebalance-only, simply declare it ain't timing based on predictive methods.

 

[Lakedog]

Oh please. Had this all been posted a year ago, you know all these folks saying "Oh, maybe it's market timing, who cares what it's called" would have been skewered.

Well, this thread is posted under the forum titled "Active Investing, Market Strategies & Alternative Assets" so not sure why anyone would have an issue.

 

[Chuckanut]

"I would cut your bond allocation at least in half."

Where was that advice two years ago?

Two years ago when I read articles about negative interest rates in some European countries like Germany I decided to sell all my long and medium term bond index funds. I basically considered that to be locking in some profits. Is that the same as market timing? Maybe. I was just trying to lock in some profits.

 

[daylatedollarshort]

Where was that advice two years ago?

Two years ago when I read articles about negative interest rates in some European countries like Germany I decided to sell all my long and medium term bond index funds. I basically considered that to be locking in some profits. Is that the same as market timing? Maybe. I was just trying to lock in some profits.

I don't know about two years ago, but just over a year ago Bill Bengen was saying one could withdraw 4.5%, if inflation stayed in check. Though curiously he also said he slashed his equity allocation in his own portfolio in half.

"I remain unconvinced at this point that the rule is inappropriate. I think there is a good chance of it continuing to work unless we get in a severe inflationary environment."

https://www.barrons.com/articles/th...he-says-it-now-could-be-up-to-4-5-51611410402

 

[ncbill]

So what's your priority?

An asset allocation of 30/70 to 70/30 following the 4% rule would normally last 30 years.

But the ending portfolio statistically will be much larger for the latter versus the former.

If your goal is to leave a large inheritance then it's best to pick a higher equity AA and live with the volatility over those 30 (or more) years.

And if you have had the foresight to come to this and similar forums you will almost certainly be dead before you ever run out of money:

https://engaging-data.com/will-money-last-retire-early/

E.g., my personal chances of being DEAD are roughly:

1 in 5 at age 70

1 in 3 at age 75

1 in 2 at age 80

2 in 3 at age 85

 

[pb4uski]

Not sure what to call it... but IMO it's just common sense.

The Fed has signaled that it intends to raise interest rates... probably 200bps but we'll see. If the Fed raises interest rates then the value of long bonds will decline significantly... generally 2x duration... so if duration is 6 then that would be a 12% decline and all else being equal it would take 6 years for the bond or bond fund to recover the decline in value from higher yields.

So if one was to redeemd bond funds now and invest in a short UST ladder and wait out the decline in value caused by the increase in interest rates, I think that is just smart strategy. Market timing... perhaps... but smart market timing.

Market timing in bonds is different from stocks... its rare that it is highly likely that stocks will go down (or up)... but you can't say that for bonds right now.

 

[daylatedollarshort]

Not sure what to call it... but IMO it's just common sense.

The Fed has signaled that it intends to raise interest rates... probably 200bps but we'll see. If the Fed raises interest rates then the value of long bonds will decline significantly... generally 2x duration... so if duration is 6 then that would be a 12% decline and all else being equal it would take 6 years for the bond or bond fund to recover the decline in value from higher yields.

So if one was to redeemd bond funds now and invest in a short UST ladder and wait out the decline in value caused by the increase in interest rates, I think that is just smart strategy. Market timing... perhaps... but smart market timing.

Market timing in bonds is different from stocks... its rare that it is highly likely that stocks will go down (or up)... but you can't say that for bonds right now.

Some of us here have been doing exactly that this year and have been called market timers, and not in a complimentary way. So far it has worked out really well.

 

[MichaelB]

Not sure what to call it... but IMO it's just common sense.

The Fed has signaled that it intends to raise interest rates... probably 200bps but we'll see. If the Fed raises interest rates then the value of long bonds will decline significantly... generally 2x duration... so if duration is 6 then that would be a 12% decline and all else being equal it would take 6 years for the bond or bond fund to recover the decline in value from higher yields.

So if one was to redeemd bond funds now and invest in a short UST ladder and wait out the decline in value caused by the increase in interest rates, I think that is just smart strategy. Market timing... perhaps... but smart market timing.

Market timing in bonds is different from stocks... its rare that it is highly likely that stocks will go down (or up)... but you can't say that for bonds right now.

Isn’t this laddering similar to what bond mutual funds do? How can you be sure this strategy will result in a higher ending balance?

 

[W2R]

If it quacks like a duck...

+1

"some" would call it market timing? It is market timing, it's the very definition of market timing. Going from 60/40 to 33/67 is market timing, period.

+1

I was too "chicken" to say this when I wrote my post, but I completely agree. Anyway whatever anyone wants to call it, I won't DO it.

Although I have forgotten his username, I'll never forget the forum member who ended up having to change his retirement plans due to having sold low near the bottom of the 2007-2009 stock market. IIRC he ended up moving to Mexico due to the lower COL there, even though that was not his original plan and he didn't want to do it. I felt so sad that this happened to him. He wasn't the only one.

Later there were several others who said their portfolios took a big hit in the long term due to 2007-2009. Mine didn't, not due to any great wisdom but due to doing nothing.