Index Fund Investing Involves Timing The Market
If you’ve read up on investing you’ve come across work published by Dr. William Bernstein, John Bogle and James Dahle. Unanimously, they tout that timing the market is a losing strategy and that when it comes to investing on Wall Street, an indexing approach should be used, where low-cost, passively managed mutual funds are held long-term.
Many financial advisers and robo-advisers are all following the same strategies. I would say perhaps for the past 2 decades, this passive index investing strategy has been quite popular.
“You Shouldn’t Time The Market”
It’s frequently suggested that you shouldn’t time the market, it’s said that the average investor, and even professional investors, don’t have enough knowledge to “beat” the market. Markets are said to be efficient.
Data is provided to show that active fund managers (think hedge fund) actually end up losing money in the long-run compared to the passive index fund investors. And that the costs/fees involved in active funds negate any gains that could be had from such strategies.
Over a short enough period, any claim/hypothesis can be proven correct when it comes to the science of investments in the global economy. That’s why we have to be careful how we interpret these supposed fact which are fed to us.
Ironically, do you know what has been proven year after year to have been the #1 contributing success for a business venture? Timing. Wal-Mart came on the scene at the right time, Amazon blew up right after eBay provided an open door, Facebook became huge because they recognized the consumer’s desire to consume entertainment on their mobile device and Alibaba came on the scene at just the right time, when drop-shipping was in incredibly high demand.
Buy-And-Hold Strategy Is Timing The Market
First realize, what I am doing with this post is taking the words uttered by some experts and turning them around, proving my own point by using the opposite of their statements – it’s a bit superficial if that was the only purpose of this post.
What I want you to take away from this post is that timing the market is exactly how you can achieve the returns that your peers can’t. The caveat, you have to put in the effort to learn the strategies, implement them and learn from your mistakes, and you have to start small so that you don’t put your entire portfolio at risk.
If you drink the Kool-Aid and accept that the “markets are efficient” then you will have accepted the fact that you have no control over your returns and that you will allow the market to dictate your returns.
Is it wrong to pursue passive indexing, buying low-cost mutual funds that you will hold well into an old age and live off the appreciated funds and dividends? Absolutely not, if you truly understand all the facets of indexing then you will likely do quite well using this strategy.
Even with an index strategy, you are timing the market. If you invest in an index fund portfolio of stocks and bonds, then slowly change your asset allocation from your initial position of stocks>bonds to bonds>stocks, then you are timing the market. The timing comes from the fact that you believe in the long-term your funds will go up in value.
Timing the market is also referred to as speculating. It’s a 4-letter word for the indexers and the conservative. In their defense, most speculators fail. But nobody achieved incredible wealth through indexing or pursuing conservative strategies.
The 3 of you reading my blog, mom, sis, stalker-patient, know that I’m not after great wealth, but that door shouldn’t be shut for you if that’s what you’re after.
You Are Timing The Market With Your Home Purchase/Sale
The majority of physician households buy a home and try to keep it for a few decades and then sell it once the market value is ripe and they no longer have a need for a larger home. They avoid selling and buying multiple times, which has been shown to be an expensive transaction.
If you’ve owned your nice home on pill-hill for 30 years and are ready to downsize, would you sell it if the housing market was experiencing a crash? Would you sell the home you purchased initially for $800k, for $1.1 million after 30 years? Or would you wait for the housing market to recover a few years and then sell it for a more realistic value of $2.1 million?
But most physicians don’t time the market when initially buying their homes, why is that? Because a home for most of us is not an asset, it’s a liability. Liabilities are purchased when we have a desire for them, when we have adequate funds to pay for them. Assets are purchased when we either speculate that it will likely appreciate due to certain factors we are aware of or when they happen to undervalued due to a market correction, crash or depression.
But there is nothing wrong with speculating even with a primary residence, as long as we understand that the backbone of it is still a liability. If you buy a home in a desirable neighborhood, close to the beach, your asset is likely to appreciate – will you capitalize on your home when its value has risen, that’s a whole other post.
Timing The Market With Wall Street Investments
You probably knew that I was going to come back to this topic, whether you could/should time your stocks/bonds/REITs etc.
I want everyone who reads this blog to just understand the financial world that controls so many aspects of our lives. It’s not about making you change your strategies or push you into something risky. Having all the perspectives should help you make more informed decisions.
Understand that when the indexers talk about the hedge fund managers “losing” money it’s not quite that simple. A brilliant investor who is investing other people’s money actively and charging a handsome fee to do so, doesn’t have it easy. There will always be losses, there might be months or years when an investment tanks.
A brilliant investor knows that the lows are part of the game, it’s necessary, and allows them to position themselves on the sidelines during such times and come back in when they feel there is some profits to be had.
But they aren’t controlling their own money. Their customers can destroy the fund manager’s game by bailing out when the investments depreciate. That’s exactly what many customers did in 2008. And by doing so they locked in losses for the fund manager.
The reality is that quite a few fund managers saw the the writing on the wall. They waited and waited, took on some loss and then decided that it was time to sit on the side lines and experience a few years of no returns. They sat on their own money for nearly 2 years and got in when they saw the signs of recovery and were able to get returns far in excess of what indexers are boasting about now for 2016.
What Are Your Realistic Options?
If you want to time the market, if you want to use the various strategies out there that will help you get out and come back in at the right time, then you have to really study the various techniques, practice them, master them and eventually profit from them.
I think everyone should start slowly and then increase their risk with a small portion of their money, make their mistakes and decide how much time and learning they are willing to put into their investment strategy.
The above concepts are the polar opposite of passive investing. With the above strategies you are trading your time spent researching the markets, your experience with your own local expertise for higher returns.
Active (timing) strategies:
- A few hours a week of time spent
- Long lead-time to learning the strategy
- Practice makes perfect
- Need to change strategies with changing times
- You have much more control
- Return on investment, 15-25%
- A few hours a year
- You can learn the concept within a couple of hours
- Not dependent on your input/expertise
- You have very little control
- Very rarely would you have to change the strategy
- Return on investment, 3-5%
If you start with the indexing strategy, all you have to do is buy the recommended index funds, buy more on a regular basis, not sell when the market crashes, continue investing when the market is down, and finally take a more conservative position with your asset allocation as you get older.
If you want to start a timing strategy then I recommend starting with the books above. Partition an account in your IRA where you can “practice” your strategy over the next decade. The advantage of doing so in an IRA is that any gains you have won’t be taxed. You can invest in damn near anything in an IRA.