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I think that my recent short term "failures" will still be helpful to my returns in the long run. The "long run" just may be a marathon, though.
By the way, how do I make a profile on this site to get an icon and a link to my site. I can't find it.
Thanks.
I am impressed that you posted your loses after the fact and then defended why you plan to continue on your current path. I have seen others go silent when the market turns against their previously posted strategies. What you have done is honorable.
I challenge you to provide any evidence for the basis of your belief that "it is worthwhile to include some form of market timing as a small part of an overall strategy". If, as I suspect, this just a gut feeling, then I'd like to suggest that you research the issue. My research has led me to believe that effective and consistent market timing is simply not possible; not in a bear market, not in a bull market, *never*. Attempts to time the market are bound to revert to the mean. And you are bound to lose out in the long run because of the cost of lost opportunity. If you have extra cash lying around that you are using to "play the market", then your assets are not optimally allocated because that cash should have already been automatically invested or saved.
Trying to time the market is good for exactly one thing - learning not to try to time the market.
If one believes that the market will go up in the long term, and you're investing in the long term, then it's never a bad time to buy. You might not buy at its lowest point, but it theoretically will get higher in 5 years plus. So he's kind of dollar cost averaging on the way down. It's better than dollar cost averaging on the way up even if he doesn't get the absolute lowest price at the bottom. It doesn't feel good watching a stock or fund go down after you buy it, but we may be vindicated one day with higher returns later.
His extra cash may have been properly invested in something with safe low returns waiting for the opportunity for him to invest in stocks at a better price. I use bond funds as a buffer this way. Then I sell stock funds and put money into the bond funds when stock prices are high.
Playing the market is all a big gamble, but a few percentage points here and a few there at each transaction can multiply out to make a significant difference. There is some luck, gut feel, and psychic power involved though.
Atul
I agree that it's never a bad time to buy. Conversely, it's never a good time not to buy. That's why regular automatic investment makes sense and timing the market doesn't. Your cash is never properly allocated if you are waiting for the opportunity to invest at a better price. Because while you are waiting, in the irrational hope that you can time the market, you are losing the opportunity to be as fully invested as your risk tolerance allows when prices start to rise. My goal is to maximize the risk adjusted returns on my investments. That is a very different proposition from gambling and placing one's faith in luck, gut feel, or psychic power.
This simple reason dollar cost averaging works is because you are investing a fixed dollar amount at regular intervals. Because of this you automatically buy more shares when the market is down and less shares when the market is up.
You are seeing that the market is down, relatively speaking, and then deciding to buy more. That is timing and that is why you aren't going to beat dollar cost averaging.
This may be true for people who don't pay much attention or don't have any sense of intrinsic value but for someone who pays attention I disagree with this statement.
Warren Buffet certainly doesn't follow it. He said repeatedly that he thought tech stocks made no sense in the late 1990s. Everyone said Buffet has passed his prime. He no longer understood the new economy. Ah, but sadly he did, and he was right and most everyone else is wrong. Markets and economies run in cycles. They get overvalued and undervalued. When they are not valued properly there is no guarantee they will quickly revert to the mean but intrinsic value can still be approximated using historical norms.
Warren Buffet had no interest in Financials 2 years ago, but he does now. He has loved GE for decades. He said so last week. But he didn't invest until he got the right terms and he got options at a price he considers a bargain. Now granteed he is being given a sweet heart deal on these preferred stock deals but he has said that he believes there are long term values now that were not there before. Berkshire has been sitting on 40 billion of cash for years. Every year Buffet says he is looking for a good place to invest that money but none exist. Clearly he does not believe that it is never a good time not to buy.
Again, I am not suggesting most people are capable of doing this. But just because most can't do it doesn't make the statement true. I know you have no way to verify this but I said the US stock market was over-value in late 1998 and made no sense to me. Unfortunatley I didn't follow my own advice and I stayed invested. I was 18 months early but I was right. I said housing made no sense in 2005. I was 2 years early but I was right. I said the current stock market was over-value in late 2006, and I actually did pull all of my funds to cash. I was about 1 year early on that and it took until this spring to get back to where I pulled out but I am very right now and have just started to nibble back in.
So no I don't agree that its never a good time not to buy. Prices get to a point where they are being driven by pure supply demand when one or the other is out of balance with underlying values, and when that happens, its not a good time to buy. Identifying that conclusively may not be very concrete, but I think you can get close enough to know when it makes no sense to invest in certain things because even though they may go higher, the risk that the underlying values starts to be important again is too great and when I believe that to be happening, I take my money off the table. (Well I do now after not doing so in 1999, even though I said you should.)
By the way, thanks for Consumerism Commentary. I'm finding it interesting and educational.
I agree that, in retrospect, it's possible to identify whether a certain time period *was* a good time to buy or not buy. However, I stand by my argument that timing the market is equivalent to fortune telling. Anecdotal evidence is not a strong counter-argument. The academic research is clear - there is a very high probability that any investment strategy involving market timing will revert to the mean. The lesson: don't try to beat the mean - invest regularly in an index fund.
By the way, since you mentioned Warren Buffett... he recommends that individual and institutional investors buy low-cost, broad market index funds - not sector funds like technology or financial services. And when he buys shares in a company, as with GE, he pores over their balance sheets and then buys a controlling interest - that's not a strategy that you or I should be contemplating.
I agree that most people can't do this and most people should buy index funds and most people should not try to time the market. My point was merely that I don't agree that people who are well informed in a subject area can't identify opportunities and over-valuations that allow them to time.
I also agree that Warren's advice to most people is to not try to time or do any picking. He does buy a controlling influence often. But often he does not. He has no controlling influence in either Goldman Sacks or GE as is the case with many of the huge stocks he piles into. He just feels he knows their business and understands it well enough to determine when they are a good buy and when they are not.
I guess it comes down to the old argument about efficient markets. If you believe markets are always 100% efficient and they always represent everything that is and can be known about the markets at any given time then no one has any ability to ever beat the market other than by shere luck. I think people like Warren Buffet and others prove that notion false. For instance one of the most common beliefs about investing is the need for diversification. This is because most people don't know enough to protect themselves. And this is why Warren recommends what he does for the average investor. But did you know that for experienced investors, Warren does not believe in diversification and actually believes it leads to sub par results. This can be evidenced by this quote from Warren: "Wide diversification is only required when investors do not understand what they are doing." And with respect to Warren's big investment timing secret: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
It's difficult to catch ups and downs minute-by-minute, but I think people who follow trends have it right.
Additionally, yours is a bad example. You use mutual funds where your trade doesn't go until later to try to time the market that right now is so volatile it goes up/down by a lot in the same day. Doing it with ETFs/stocks is different since your order is filled very quickly even if it is a market order; but you also have an opportunity to do a limit order i.e. set a specific price.
Here's an interesting article on the topic: http://www.nytimes.com/2008/03/09/business/09st...