Timing the market: finding a good entry point

[DocCyane]

So after years of just putting my pennies into index mutual funds whenever there were pennies to be had, I've decided I need to do a better job of buying when the markets are down. I realize dollar cost averaging should theoretically even out the highs and lows, but since I am disciplined with money, I can hold on to a stash until the market is at a yearly low, for example, and then buy a ton.

Is that a crazy notion? It's sort of timing the market, but not. It's more like finding a good entry point so the money has room to grow.

Here's the question.

My index fund has ranged this year from $108 to $135 a share. It is at $127 right now. What entry point would you consider good? If you need more data, the fund is VFIAX. But we're just playing hypotheticals.

Thoughts are appreciated.

[KingCoin]

Is that a crazy notion? It's sort of timing the market, but not. It's more like finding a good entry point so the money has room to grow.

This is unambiguously market timing. As far as I know, no one in the world is able to consistently buy low and sell high, and odds are, you're not going to be the first.

The problem of course is that there's no way to objectively determine when the market is "high" or "low". The market has sold off the past few days. Could this be a "consolidation" preceding a multi-year bull market? Or perhaps we recently saw market highs, and we're headed for a 20% "correction". There's no way of knowing, and no data about past prices is going to tell you (this has been extensively demonstrated in reams of academic data). Hindsight is 20/20, and it's all too easy to look back and say it was obvious that you should have sold in 2007 and bought in 2009, and that you should "do better" next time. But making these decisions in real time is very difficult. In 2007 everything was going gangbusters with no obvious obstacles in sight. Why would you have sold? In 2009 banks were failing left and right and we were flirting with a second depression. Certainly it was prudent to wait for things to "bottom" and the economy to start turning around before buying. Right?

You can cook up some naive indicators for value (buy when Avg, P/E is lower that 16), risk (buy when VIX is over 30), or past prices (buy when stocks are at one year lows), but no simple rule has significantly outperformed the market broadly. What's likely is that you'll end up holding significant amounts of cash for lengthy periods, waiting for your chosen indicator to signal buy (possibly for years), and miss tons of capital gains and dividends in the meantime.

[maizefolk]

As far as I know, no one in the world is able to consistently buy low and sell high, and odds are, you're not going to be the first.

It sounds like DocCyane is only trying to buy low, but never going to try to sell high. I still doubt that it will be beneficial, but the overall damage which can be done to a portfolio is lower than if the investor is constant trying to sell and re-purchase at lower price points.

DocCyane, if dollar cost averaging doesn't appeal to you, you could look into the techniques called "Value Averaging" and "Dollar Value Averaging." Both techniques attempt to do what you're describing: buy more when prices are low and less when prices are high.

The downside of both approaches is that they require you to hold significant amounts of cash (earning little or no interest) in wait for larger purchases when prices drop, and therefore they will tend to underperform dollar cost averaging during prolonged bull markets. Here's more detail on the two strategies:

http://www.investopedia.com/articles/stocks/07/dcavsva.asp

Good luck.

[DocCyane]

Thank you for the solid responses. I've got some research ahead of me so I can make a proper decision. Thanks again.

[Another Reader]

I'm acquiring assets for the long term but I'm always looking to buy on sale.  Even MMM mentioned recently throwing some extra cash at the market the last time it was down significantly.  One possible compromise is to dollar cost average a base amount in and have some cash percolating on the sidelines for various purposes including what appear to be buying opportunities.  You are likely to be right more often than not, so throw the extra in when corrections occur.

[DocCyane]

I'm acquiring assets for the long term but I'm always looking to buy on sale.  Even MMM mentioned recently throwing some extra cash at the market the last time it was down significantly.  One possible compromise is to dollar cost average a base amount in and have some cash percolating on the sidelines for various purposes including what appear to be buying opportunities.  You are likely to be right more often than not, so throw the extra in when corrections occur.

Oh, I love a good compromise.

My 401k gets a contribution every week, high or low, so that's dollar cost averaging. My ROTH IRA annual contribution and any extra cash, however, could be invested when there is a good buy to be had.

[fiveoh]

Personally I would hold off a little while longer.  IMO I think the fiscal cliff will continue to weigh on the markets at least thru mid december.  Just my .02.  We could also have a santa claus rally....you never know.

[Adventine]

One possible compromise is to dollar cost average a base amount in and have some cash percolating on the sidelines for various purposes including what appear to be buying opportunities.  You are likely to be right more often than not, so throw the extra in when corrections occur.

Seconded. If you're saving, for example, 5k a month, you could invest 4k monthly in your fund of choice, and keep the other 1k in your savings account.  I do this with my own monthly savings and call the extra cash my "Rare Opportunity Fund."

It comes in really handy, not just for investing in lows in the stock market, but also for investing in other irregular money-making opportunities. For example, I recently used my Rare Opporunity Fund to purchase a very nice used car that I am currently reselling for much higher.

[Another Reader]

Because "you never know," the average investor is generally better off dollar cost averaging in for the bulk of their investing dollars.  That's especially true for the retirement accounts, and for any goal where there is a long time horizon.  However, market corrections occur fairly often.  If you are saving and investing prudently, there will be times you have a little more cash than you really need to have on hand.  If the stock market appears to be on sale when that happens, then I throw the extra money at it.

If you trim your sails so carefully that you never have "extra" cash on hand, use your HELOC as your emergency fund, and budget to the last penny, then you won't do this.  I prefer solid cash reserves as my emergency fund, so I can usually find a little extra when I see what I think is a good buy.

[tooqk4u22]

I believe market timing is possible but only at the extremes and when supported by various metrics, but these extremes are when the world feels like it is burning or when there is immense euphoria.  When the world is burning and values are cheap then buy big and when it is euphoric and expensive then sell big.  Problem is this is exactly counter to human nature so second the recommendation to split it...regular contributions and a war chest on the side just in case. 

That said, I don't think we are in either scenario right now.  The markets are pretty well valued right now but there should be some pressure in the near term due to fiscal cliff and more so due to increased taxes that will happen.  So there may be downside risk right now but probably not more than 10%...unfortunately I don't see any upside potential for a few years.

[yolfer]

Looks like your question has been answered, but here's an interesting fact:

It's been proven that over the long term, your asset allocation is 10x more important to your portfolio's return than market timing.

See: http://en.wikipedia.org/wiki/Asset_allocation#Academic_studies

[KingCoin]

I would add that periodically rebalancing a portfolio with diverse asset classes is a good way of rotating into "cheap" assets. As stocks sell off and treasuries rally, you sell treasuries and buy stocks and vice versa. The benefit of this approach is that it's automatic once you set your asset targets. You're freed from having to worry about valuation metrics and noisy headlines about things like fiscal cliffs, which are surely already priced in.

[econberkeley]

Doccyane,

I would follow the 12 month moving average. It helps avoiding major crashes.

http://www.advisorperspectives.com/dshort/updates/Monthly-Moving-Averages.php

[smedleyb]

I think 1405-1420 on the SPX represents some pretty strong resistance (October low -- support, once broken, now becomes resistance).  I expect the market to pull back around here and I'm betting that way, but setting stops above 1420 just in case.

Big fan of using 50 and 200 MA's to time trades.  Also use a 13 day to gauge shorter term momentum. 

I think the Santa Claus rally is on, but not before a little backing and filling (1375-1380) takes place. 

[DocCyane]

I'm going to have to Google about 96% of that.

[smedleyb]

I'm going to have to Google about 96% of that.

Some basic concepts:

support -- price zone in which buyers are willing to accumulate stock, and sellers are exhausted.

resistance -- price zone where sellers become more aggressive, but buying drys up.

trend -- overall trajectory of the market; up (bull), down (bear), or sideways.  A corollary to this rule is: time frame of trend, be it short term (hours, days), intermediate term (weeks, months) or long term (months, years).  It is possible to bearish short term while being bullish intermediate term yet bearish over the long term.  Market timers attempt to locate trends within larger trends, etc, and trade in the right direction.     

MA -- moving average; the average price at which a particular security has traded over a defined length of time.  Thus, 200 DMA (Day Moving Average) is the average price at which a security has traded at for the past 200 days.  Considered important support levels by traders who employ technical analysis to time trades.

This is just a taste.  It's a huge field, full of colorful characters, many of whom want your money as they peddle the "sure thing" market timing methodology, blah, blah, blah. 

Get some books.  Read.  Test your theories/strategies in a dummy account.  Observe what's before your eyes.  If after all this you deem that you posses a special skill that allows you to consistently anticipate the market's next move, to speculate correctly as it were, then by all means trade away.  If, however, you find yourself just treading water, or repeating the same mistakes over and over, or becoming miserable when a trade goes against you, and on the flip side,  overly euphoric when you guess correctly, then perhaps speculation is not your cup of tea.

But you'll never know until you try.

[chucklesmcgee]

I'm going to have to Google about 96% of that.

Some basic concepts:

support -- price zone in which buyers are willing to accumulate stock, and sellers are exhausted.

resistance -- price zone where sellers become more aggressive, but buying drys up.

trend -- overall trajectory of the market; up (bull), down (bear), or sideways.  A corollary to this rule is: time frame of trend, be it short term (hours, days), intermediate term (weeks, months) or long term (months, years).  It is possible to bearish short term while being bullish intermediate term yet bearish over the long term.  Market timers attempt to locate trends within larger trends, etc, and trade in the right direction.     

MA -- moving average; the average price at which a particular security has traded over a defined length of time.  Thus, 200 DMA (Day Moving Average) is the average price at which a security has traded at for the past 200 days.  Considered important support levels by traders who employ technical analysis to time trades.

This is just a taste.  It's a huge field, full of colorful characters, many of whom want your money as they peddle the "sure thing" market timing methodology, blah, blah, blah. 

Get some books.  Read.  Test your theories/strategies in a dummy account.  Observe what's before your eyes.  If after all this you deem that you posses a special skill that allows you to consistently anticipate the market's next move, to speculate correctly as it were, then by all means trade away.  If, however, you find yourself just treading water, or repeating the same mistakes over and over, or becoming miserable when a trade goes against you, and on the flip side,  overly euphoric when you guess correctly, then perhaps speculation is not your cup of tea.

But you'll never know until you try.

This stuff is just like reading tea leaves. Reading posts by people who use these terms looks a lot like astrology: it's written in a way that sounds like it's actually predicting something, but in the end it's also so open ended that you never could come back and say the author was wrong. If you show people a scatterplot of completely random dots, most people will think they see a pattern of some kind, it's just a natural human impulse to try and find order in disorder. There's absolutely no one who can consistently outperform the market because of any magic skill at reading charts or metrics. 

Some "gurus" may have had portfolios that have beaten the market year after year, but that's only a natural expectation of a billion people guessing randomly. Aside from insider information or extra information not known to the rest of the investors or a substantial enough stake to actually be able to change the company itself as a result of your purchase (Buffett buying up companies and making management decisions) you simply are no more likely to beat the market than chance.  Take any guru who's given out enough stock picks (Cramer for instance) and you'll see they do no better than random. That's assuming gurus even decide to be that definitive- most will talk about so many trends, possible factors that could affect stocks, time spans and everything that every piece of advice they give boils down to "the market will go up or down".

Don't waste your time on timing or picking stocks. Unless you have more information than other people playing the game and are able to respond to changes immediately, there's just no way you're going to beat an index fund on average, especially when you take into account brokerage fees and transaction costs.

[smedleyb]

This stuff is just like reading tea leaves. Reading posts by people who use these terms looks a lot like astrology: it's written in a way that sounds like it's actually predicting something, but in the end it's also so open ended that you never could come back and say the author was wrong. If you show people a scatterplot of completely random dots, most people will think they see a pattern of some kind, it's just a natural human impulse to try and find order in disorder. There's absolutely no one who can consistently outperform the market because of any magic skill at reading charts or metrics. 

Some "gurus" may have had portfolios that have beaten the market year after year, but that's only a natural expectation of a billion people guessing randomly. Aside from insider information or extra information not known to the rest of the investors or a substantial enough stake to actually be able to change the company itself as a result of your purchase (Buffett buying up companies and making management decisions) you simply are no more likely to beat the market than chance.  Take any guru who's given out enough stock picks (Cramer for instance) and you'll see they do no better than random. That's assuming gurus even decide to be that definitive- most will talk about so many trends, possible factors that could affect stocks, time spans and everything that every piece of advice they give boils down to "the market will go up or down".

Don't waste your time on timing or picking stocks. Unless you have more information than other people playing the game and are able to respond to changes immediately, there's just no way you're going to beat an index fund on average, especially when you take into account brokerage fees and transaction costs.

As a follow up, I did dump my SPY puts at 140.40 this morning for a small gain.  Didn't like the strength in AAPL (and the overall stickiness of the NAZ) as far as the short side went.   

As far as addressing your major points:

https://forum.mrmoneymustache.com/investor-alley/efficient-markets-rip/

[Kriegsspiel]

I would add that periodically rebalancing a portfolio with diverse asset classes is a good way of rotating into "cheap" assets. As stocks sell off and treasuries rally, you sell treasuries and buy stocks and vice versa. The benefit of this approach is that it's automatic once you set your asset targets. You're freed from having to worry about valuation metrics and noisy headlines about things like fiscal cliffs, which are surely already priced in.

This way of thinking appealed to me, so that's what I'm moving towards.  So for someone who is just starting out, just divide up all your money and set it up into your asset allocation.  Even if you are buying an overpriced asset that first time, from that point on you will only be buying the cheapest assets in order to keep the ratios constant.   Pretty simple and it seems like it's effective.

[chucklesmcgee]

As a follow up, I did dump my SPY puts at 140.40 this morning for a small gain.  Didn't like the strength in AAPL (and the overall stickiness of the NAZ) as far as the short side went.   

As far as addressing your major points:

https://forum.mrmoneymustache.com/investor-alley/efficient-markets-rip/

This is more of a niggling at some of the finer nuances of the efficient market theory than undermining the conclusion that the stock prices are essentially random (though as an aggregate net positive returns) and that people without extra information can't outperform the stock market above chance.

The first two points address concerns that a truly efficient market with perfectly rational people shouldn't have generated the massive collapse. Fair. A common shortcoming of classical economics is that it assumes all participants are perfectly rational. So yes, this collapse indicates that EMH isn't a perfect explanation of market behavior. Practically though, this doesn't undermine the conclusion that market behavior is unpredictable and cannot be profited on above chance without additional information. Are changes in stock prices by irrational investors predictable? Theoretically, yes. Practically it has yet to be demonstrated.

"If the markets are efficient, then no one can [devise an effective strategy certain to] beat the market in the long run; an apparent long-term success can happen by pure chance only."

That sentence doesn't even make sense, so I added the bracketed portion. If you had monkeys randomly invest in the market, after 20 years, around 1 in a million would be expected to have beaten the market every single year by chance alone. Fair premise. Let's move on.

"However, argues Buffett, if a substantial share of these long-term winners belong to a group of value investing adherents, and they operate independently of each other then their success is more than a lottery win; it is a triumph of the right strategy."

That's not a valid argument. Let me make a valid argument that WOULD undermine the assertion that there's no strategy that will beat the market above chance:

"However, argues chucklesmcgee, if a substantial share of these long-term winners belong to a group of value investing adherents value investing adherents are over-represented in successful long-term investors relative to investors as a whole across multiple time spans, and they operate independently of each other then there's evidence that a strategy exists which delivers above-chance returns."

For the sake of argument we also need to assume that value-investing adherents (VIAs) all can be identified as such and all actually work on some definable and uniform set of rules. Just because a lot of the successful investors are VIAs doesn't mean VIA is a successful strategy. Is every VIA a successful investor? Does every VIA get above average returns? Has no VIA gotten below average returns? And really, the bottom line question: On average, do VIAs outperform the market average in the long-run?

Buffett's book is not empirically rigorous at all and doesn't advance his theory. He basically picks out 9 individuals he claims are VIAs who had returns well above the market average, for portfolios starting at different times, ranging from 12-28 years. Well that doesn't prove jack squat. These are numbers entirely within chance. Yeah, I bet 9 people over 6'0" also outperformed the market over a similar period, did being tall cause them to be great stock pickers?

So I suppose whether or not the market is truly efficient or not is one for academic contention. But my conclusion stands. There's no definable strategy that will give an ordinary investor sitting at home an above-average chance of beating the market or predicting the market in advance. My contentions that there's no one out there capable of making stock predictions better than chance or defining a strategy which gives better than chance returns stand. This world of market prediction speaks like pseudoscience and avoids making testable claims to every truly prove they're wrong.

[grantmeaname]

So I suppose whether or not the market is truly efficient or not is one for academic contention. But my conclusion stands. There's no definable strategy that will give an ordinary investor sitting at home an above-average chance of beating the market or predicting the market in advance.

Smedley and I are old pals when it comes to EMH argumentation (armchair generals? *belly laugh*). I think when the dust settled this summer, we were both saying that for many/most investors the indexing approach is the best, but where I favored EMH he favored weak weak weak EMH -- that a particularly analytical mind could outsmart the market using the proper techniques. In the end, just how inefficient the market is makes a fascinating, if contentious, topic of discussion. It doesn't affect the indexing recommendation for most investors, and it doesn't mean that investors can't have  a day-trading account for shits and giggles that will perform okay too. My camp thinks it's silly that he has a favorite stock of the week, and his camp thinks its silly that I dogmatically reject individuals beating the market being anything but a game of chance. In the end, we're not that far apart on our practical advice for most investors, though.

[chucklesmcgee]

So I suppose whether or not the market is truly efficient or not is one for academic contention. But my conclusion stands. There's no definable strategy that will give an ordinary investor sitting at home an above-average chance of beating the market or predicting the market in advance.

Smedley and I are old pals when it comes to EMH argumentation (armchair generals? *belly laugh*). I think when the dust settled this summer, we were both saying that for many/most investors the indexing approach is the best, but where I favored EMH he favored weak weak weak EMH -- that a particularly analytic mind could outsmart the market using the proper techniques. In the end, just how inefficient the market is makes a fascinating, if contentious, topic of discussion. It doesn't affect the indexing recommendation for most investors, and it doesn't mean that investors can't have  a day-trading account for shits and giggles that will perform okay too. My camp thinks it's silly that he has a favorite stock of the week, and his camp thinks its silly that I dogmatically reject individuals beating the market being anything but a game of chance. In the end, we're not that far apart on our practical advice for most investors, though.

That's fair. It's not impossible that one could develop a system to consistently beat the markets, but the evidence isn't strong enough to show that anyone has. If a particularly analytical mind can beat the market, it must be a particularly analytical mind indeed, considering how well actively managed funds do relative to index funds and the absence of anyone who can routinely make predictions as to which stocks beat the market--at least, you know, out loud, in advance.

I think a hands-off approach to investing can feel disenfranchising to a lot of people, especially Mustachians, when we take so many deliberate steps to save and reduce our spending. In the end, rate of return is one of the most important factors concerning whether we're FI yet we feel we have the least control over it.

[smedleyb]

Smedley and I are old pals when it comes to EMH argumentation (armchair generals? *belly laugh*). I think when the dust settled this summer, we were both saying that for many/most investors the indexing approach is the best, but where I favored EMH he favored weak weak weak EMH -- that a particularly analytical mind could outsmart the market using the proper techniques. In the end, just how inefficient the market is makes a fascinating, if contentious, topic of discussion. It doesn't affect the indexing recommendation for most investors, and it doesn't mean that investors can't have  a day-trading account for shits and giggles that will perform okay too. My camp thinks it's silly that he has a favorite stock of the week, and his camp thinks its silly that I dogmatically reject individuals beating the market being anything but a game of chance. In the end, we're not that far apart on our practical advice for most investors, though.

In short, I'm an incorrigible speculator!

Let it be known:  there is no substitute for proper asset allocation and low-cost index investing for the vast majority of Mustachians.

That said, shorting the QQQ's in size this morning (66.07).  File this rally under "too far too fast."  Should the SPX recapture 1430 and the NDX 2700 with authority, I'll exit this trade.


EDIT:  covering 1/2 short at 65.70 (Friday, 1:20).

[tooqk4u22]

Let it be known:  there is no substitute for proper asset allocation and low-cost index investing for the vast majority of Mustachians.

Clearly still bruised from your prior experience on this forum....good strategy to include the legal disclaimer ;)

[smedleyb]

I think 1405-1420 on the SPX represents some pretty strong resistance (October low -- support, once broken, now becomes resistance).  I expect the market to pull back around here and I'm betting that way, but setting stops above 1420 just in case.

Big fan of using 50 and 200 MA's to time trades.  Also use a 13 day to gauge shorter term momentum. 

I think the Santa Claus rally is on, but not before a little backing and filling (1375-1380) takes place.

Is SPX 1386 close enough to 1380?

Regardless, Santa Claus rally is so on.  Observing big break-outs over multiple sectors today -- banks (BKX), mid-caps (RUT), housing (HGX), REITS (IYR), as well as the major averages (SPX, NDX).   This market seems destined to melt up as underinvested and underperforming active funds and hedge-fund types chase the market in a frantic effort to keep up with their benchmarks, or more specifically, to not fall further behind.   

Throw in a political process seemingly working towards averting a full blown cliff dive, and thus a political process thus seemingly working, period, this rally has legs.   It would take some pretty hefty news/disaster to derail this bull run, IMO.