Index funds (the passive broad equities kind) are expected to return just a touch over inflation in the next few years. Historically they have returned closer to 8-9%. There are numerous reasons why these lower returns of the 5-6% range are expected but it’s important to note that they are for the buy-and-hold strategy.
These values don’t take into account dollar cost averaging, asset allocation adjustments, or any other timing strategy. I’m a bit of a stickler for terminology and since indexing is a type of timing strategy, it’s important to discuss other timing strategies which can help us improve our rate of return.
Good Timing Strategies
For the most part when referring to timing strategies, we’re talking about the securities market, meaning, Wall Street investments such as stocks, bonds, mutual funds, etc.
It is said that you cannot successfully and consistently time the securities market when it comes to buying at the lowest point in the market and selling at the highest – that’s 100% correct.
Dollar Cost Averaging
However, when you do dollar-cost-averaging, you are preventing yourself from making one large purchase of your investments and instead spreading the purchase out over several months, evenly.
Example: You can either invest the entire $18k for your 401k at the beginning of the calendar year or you can make 12 separate contributions of $1,500.
If the markets are behaving in a traditional manner where it’s hard to tell if the market is at its peak or trough, then it’s best to spread the purchases out. That way you aren’t stuck buying at a very high price-point with all of your money.
Spreading the purchase over several months means that you’ll make some of the purchases when the market is up and some when the market is down. And by keeping the purchasing amount consistent, you’ll buy fewer funds when the price of the fun is up and you’ll purchase more when the price of the fund is down.
Asset Allocation Adjustments
By adjusting your asset allocation when your different investments move in different direction, you are making sure that you are selling some of your appreciated investments and buying the ones which are priced lower and have depreciated.
Example: You have a stock index fund and a bond index fund, with your money divided between them initially at a 50%/50% ratio. After 8 months you see that your equities have gone up by 12% and your bonds dropped by 8% – your current ratio is sitting somewhere in the 65%/35% range.
It’s a good idea to make an asset allocation adjustment by either buying more bonds (even though they have dropped in value) or by selling some of the appreciated equities and using the proceeds to buy more of the bonds.
If you’re working, it makes more sense to invest incoming dollars in the depreciated bonds. If you aren’t earning income, it’s better to sell the appreciated equities and purchase more bonds from the proceeds.
Bad Timing Strategies
So why is it said that timing the market is a bad idea? Timing means different things to different people. Layman’s timing means that you are sitting by your computer and watching your investments and waiting for them to max out in value so that you can sell them.
The layperson also understands timing as buying more of a particular investment once they believe the bottom of the market has been reached. But in reality, there is no way to tell the exact top or bottom of the market.
Buying Netflix stock hoping that it will go up and then buying it again when it goes down is a classic example of a bad timing strategy. It’s not an impossible way of making money – the problem is that it’s unlikely that you will make consistent money this way.
Timing The Market With Your Income
So does it mean that there is no way to tell where the markets are? Of course not. In real estate it’s obvious when we are towards the top of the market. And when it comes to securities, it’s the same. Everyone’s portfolio is at an all-time high – hence, the markets are towards their peak.
So does it mean it’s about to crash?
Not necessarily. It could keep going up or it could just stay at this current price for another few years. And yes, of course it could also correct by a certain percentage and either climb up again or keep going down.
As healthcare professionals we earn a game-changing income. When you’re earning close to $100/hour it’s quite easy to make some significant financial gains. Not only can debt be destroyed quite quickly but we can employ wise timing strategies to increase our rate of return.
Remember how I said that the securities market is expected to return somewhere in the 5-6% range? Well, by adding good timing strategies you can increase that.
An income timing strategy involves working more during market downturns to feed more money into your investments. If you only earn $30k a year it’s simply not worth it – you likely will have very little disposable income.
But when you can earn $2k in a weekend or $5k by taking an overnight call, you can make a huge difference in the outcome of your investments. You’d use that money to buy the funds which have dropped in value.
Now you’ll be positioned in the same investment, owning higher number of shares which were purchased at a discount. When these investments do go up in the future, your discounted funds will drive your returns that much higher.
So why not keep some cash aside for just this purpose?
By keeping some cash on the sidelines in order to invest in your funds when they drop in value, you’re employing a bad timing strategy. Why?
Because you are now keeping cash idle. You’re keeping it out of the market and preventing it from earning a return whether in dividend yield or in appreciation.
That’s why an income strategy is the only viable option that I see for a healthcare professional to feed new money into their investments using a timing strategy.
Even Better When You’re Retired
I make it a point on this blog to insist on ‘enough is enough‘. There has to be an end-game otherwise it’s very easy to keep working more, earning more, saving more, taking more risk, putting off retirement, and so on.
Once you have enough to retire, that’s the best time to start cutting back. Don’t forget, your investments will continue to grow. It’s not likely that you’ll go from working full-time to polishing beer after beer on your couch all day.
You will likely do some work during retirement and most of it will offer you some sort of income. Statistically, the markets will spend more time being up than down. So, if you always work and always invest your money then you aren’t getting the best returns – there could be a benefit by timing the market with your earnings.
However, imagine 2001 or 2008 or even early 2016 when the markets took a few dives. If you had the opportunity to earn some income those weeks/months then imagine how much higher your returns would have been.
Recognizing An Up or Down Market
In the examples above it wasn’t hard to know that the market had shifted. Of course, you didn’t know how much further down it could have done – but it was unmistakably down.
And should it have gone down further, you could have continued to buy as the fund was dropping further in value.
Keeping Job Opportunities Viable
The last thing that I want to touch on is that it’s important to keep your foot in the door with income producing opportunities. If you decide to leave your full-time job and do as I said, it’s good to have multiple moonlighting gigs available.
This often requires you to do some patient-care on their respective platforms from time to time to keep your status active. The reason I am suggesting this is that when the market truly tanks, every retired healthcare professional will flood these gigs. It’ll be harder to get hours or you won’t have honed enough skills to earn a decent income.
I recall in 2009 my medical group stopped hiring because the economy was doing so poorly. They even announced the layoff of 400 nurses. In 2008 I was still in residency and moonlighting everywhere and I recall one group dropping my rate from $80/hr to $65/hr and another telling me that they no longer had shifts available for moonlighters because they were asking their own docs to pick up extra.
Enjoy Your Time Off When The Economy Is Doing Well
If you decide to time the market with your income it also means that you get to enjoy even more free time during the times when the economy is doing well.
If you enjoy working then you can always bring a few bucks here and there. Hustling harder during such times won’t really help your pocketbook much so why not take the time off and enjoy the freedom.
Want to be a superstar? Combine good timing strategies with the IRS’ favorable tax treatment of those aged 50+. You can contribute more towards your IRA and more towards a 401k once you hit age 50.
If the economy takes a dive after age 50 then that might be the best time to work, stash money away, lock in discounted investments, and enjoy a solid tax savings.