Is This Stupid? - Timing The Market

[olbaid07]

I know, I know. Never attempt to time the market.  With that being said....

New academic attending in anesthesia.  Maxing out 403b account @ 18k/yr pre-tax. Maxing out 457 account @ 18k/yr pre-tax.  My job also provides 30k/yr into a 401a account that vests 20%/yr.  I am investing 75% of total funds in a Vanguard Large Blend Index Fund (VINIX) and 25% of total funds is in Vanguard Mid/Small Cap Index Blend.

 

I am concerned that the market has peaked and I've had 16.5% returns over this past year.  Without sounding like an alarmist, I would like to try and protect my assets.

My Question:  Would it make any sense to take my money out of VINIX and put it into VBTLX (Vanguard total bond index)?

All comments and criticisms are welcome.

[ENT Doc]

This shows that you don't have a plan and/or aren't willing to stick to it (invalidating the plan). These behaviors upend returns more often than not. Read about investor policy statements on WCI or PoF or Bogleheads. Start there, develop a plan you are comfortable with, and stick to it.

[Lithium]

If you are 100% equities and scared before the market has even crashed, then yes, come up with a better asset allocation that includes bonds and stick with it until you know your risk tolerance better.

WCI's latest podcast would be a worthwhile listen.

But timing the market doesn't work.  The market has reached new highs every year for the last 3+ years, and if you used this same logic in 2014, you would have missed out on ridiculous gains.  Even if you got out now, how do you decide when to get back in?

[ajm184]

Though you don't state how old you are, as a 'new attending' if you are in your early 30's; here are my thoughts for what is worth.

a. Determine an asset allocation you are comfortable with and stick with it.

b. Root for a bear market.  Your investment time horizon and high savings rate will provide a significant return by staying in/not panicking/consistently contributing in the long run.

c. Check out this article by Ben Carlson about the worst market timer: http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

 

[RosieQ]

I remember thinking about the same think last year when the DJIA was at an all time high of 18,000. There was a temptation to go for a bit of safety and lock in some gains. However, since then there has been a nice run up to 22,000. That's a 22% return. Most downturns would involve less of a drop than that, and it would take a big recession to drop below 2016 levels. Overall, by staying in you can get larger gains that allow you to tolerate the losses that WILL come...it all evens out- or at least that's the hope.

On the other side of the market timing argument, what makes you think that the market has peaked? Corporate profits are looking pretty strong with the most recent quarter's returns. If you're into momentum theory, we are still well into positive momentum for 6 months and 12 month lookback periods (though international has more positive momentum than USA). Unemployment is well below the 12 month trailing average (one of the highest sensitivity indicators for recession), while retail sales are also up which is the second most sensitive indicator of a recession that I know of. I think there is a lot of irrational hype and that markets will likely tighten, especially around tech companies that don't have earnings to back up their "what if" valuations (ie amazon, SNAP, etc) but that solid companies will likely continue to do well for the near term. In terms of general cyclicality we are due for another downturn in the 7-10 year cycle but I can't say whether we'll have a few more good years or not before that happens.

The other great thing you have going for you is that you are early in your career. Savings rate matters more than return early on, so keep plugging at it and putting as many hundreds of thousands away as you can and you'll be there in no time! It's better to learn how to watch your retirement assets decline and learn some lessons now with a smaller portfolio than later in life when the stakes are larger.

[RosieQ]

Also, if you are 100% stocks it would be very reasonable to go 80% or so and have some bonds in your portfolio to balance volatility. Then in case of a downturn you can rebalance some into stocks and feel like you are making a nice positive move in an otherwise bad scenario. The few percent dip in potential returns from this move likely won't be life or death to your retirement and would be a very sensible portfolio without trying to market time.

[Donnie]

Trying to time the market is stupid, yes.  People have stayed out of the market for the last 7 years citing fear of a market peak.

If you are a planning to work a long time, I would keep 100% of your investments in equities.  If you work for 30 years and you save $50k a year, you have $1.5M of future savings compared to some small fraction of that amount currently invested in the market.  Even if the market crashes, you will be fine.  Keep it invested and don't look back!

 

[artemis]

If you want to protect your assets, you'll leave then alone!  Just keep steadily investing and tune out the market ups and downs.  Remember, that's money you won't need any time soon, so you need to give it time to grow.

Trying to anticipate market ups and downs is a surefire way to under-perform in the long term.  And it's the long-term you should care about when it comes to retirement accounts.

[PhysicianOnFIRE]

At least you know enough to recognize the proposed move for what it is (market timing) and ask the question. I think you know the answer. Good for you for seeking additional opinions, confirming that Yes, switching from 100% stocks to 100% bonds based on a hunch is a bad idea.

It may end up looking like a good idea in hindsight, but you can't predict whether or not that will be true. It probably won't.

Truthfully, the best thing that could happen to you is a bear market. Keep plowing money into stocks on the way down, at the bottom, and on the way up. You'll have a valuable portfolio when the market recovers from the dip. It happened to me early in my anesthesia career (finished residency in 2006) and helped launch me to early financial independence.

Jim Collins spoke about the benefit of a bear market in the wealth accumulation phase of your career in this recent ChooseFI podcast. Good stuff.

 

[Donnie]

A few people have been wishing for a bear market in this thread.  The notion that because the market declines significantly, it will return to previous levels is completely flawed and just another example of market timing thinking.  Stocks aren't "on sale" in a bear markets.  There are fundamental reasons that are driving down the stock price and unless those drivers change, stock prices will remain depressed.

It is simply not true that after a significant market correction/downturn/bear market, the return is expected to be higher than it was beforehand.  This is just market timing by another name.

I am sure that folks investing in the Japanese market are not happy with the bear market and all the great deals they got over the last 30 years.

[PhysicianOnFIRE]

Donnie wrote:

There are fundamental reasons that are driving down the stock price and unless those drivers change, stock prices will remain depressed.

Click to expand...

There may be fundamental reasons for the initial decline, but fear and poor decision making (sell low) tend to drive prices down further than what might be expected based on fundamentals. In the US, the market has always bounced back, and my glass may be half full, but I'm willing to bet that it will continue to do so. If the biggest black swan we've seen proves me wrong, I'll be glad I oversaved, but I'm planning for what I believe to be the more likely possibility of continued prosperity.

[Donnie]

PhysicianOnFIRE wrote:

Donnie wrote:

There are fundamental reasons that are driving down the stock price and unless those drivers change, stock prices will remain depressed. 

Click to expand…

There may be fundamental reasons for the initial decline, but fear and poor decision making (sell low) tend to drive prices down further than what might be expected based on fundamentals. In the US, the market has always bounced back, and my glass may be half full, but I’m willing to bet that it will continue to do so. If the biggest black swan we’ve seen proves me wrong, I’ll be glad I oversaved, but I’m planning for what I believe to be the more likely possibility of continued prosperity.

Click to expand...

That's fine, but it's market timing.  You either believe the market is random with a positive expectation value, or you believe in market timing, mean reversion, inefficient markets, and other ideas that I don't think are useful for an unsophisticated investor investing in diversified index funds.

Saying markets always bounce back is a tautology when the market is at an all time high.

[jhwkr542]

Rooting for a bear market isn't market timing if it doesn't change your behavior. You're not timing anything. If it really is a sort of random number generator, you'd want to buy a low number instead of a high number, yes? If you're maxing out your retirement savings, you have a lot more potential gain of at the beginning of your wealth accumulation if the markets are way down. I would've loved to be coming out of residency in 2008 with the knowledge I have now.

[Arkad]

PhysicianOnFIRE wrote:

Donnie wrote:

There are fundamental reasons that are driving down the stock price and unless those drivers change, stock prices will remain depressed. 

Click to expand…

There may be fundamental reasons for the initial decline, but fear and poor decision making (sell low) tend to drive prices down further than what might be expected based on fundamentals. In the US, the market has always bounced back, and my glass may be half full, but I’m willing to bet that it will continue to do so. If the biggest black swan we’ve seen proves me wrong, I’ll be glad I oversaved, but I’m planning for what I believe to be the more likely possibility of continued prosperity.

Click to expand...

Agreed. If the market always made sense, Amazon stock wouldn't be selling for anything near what it is today. You will only know if you truly have picked a plan you can stick with when the market goes south. It is one thing to say you will "buy stocks on sale". It's another to live through a period like 2008-2009 and do it.

[ENT Doc]

It's not really market timing if you're continuing to put money in based on your asset allocation.  If stocks plummet your asset allocation will likely be skewed more heavily to bonds.  Therefore, to attain your desired asset allocation (plan) you put more of your contributions into stocks.  If the aforementioned strategy is market timing then we are all market timing because we have an innate expectation, as PoF stated, that the market will go up.  Equities, due to their innate risk, should provide better long-term returns.  This fundamental principle makes for the proper long-term strategy to put money into stocks, provided it is in line with your desired risk tolerance.