RyanRyan,
It is a very compelling goal - I too would love to be able to save myself some money and maximize returns. I believe that looking back (below is a 20 year S&P returns example), that it seems so obvious that we could sell "somewhere" the top and buy "somewhere" near the bottom (it doesn't have to be perfect, after all, look how much difference is between the highs and the lows!!!). After all, I realize that I can't pick the exact high and the exact low, but even getting close looks like it would be a huge advantage. Right!?!
Unfortunately that's wrong. One reason is the power of just a handful days. One of the most compelling realizations for me to avoid trying to buy/sell into highs/lows is when I learned about the power of missing out on the X (5, 20, etc.) best days in the market over a period of time and how that would affect my long term returns. For example, the graph below shows that if you miss out on just the 10 best days over 20 years and your return would drop 3.75% (From almost ~10% return to ~6%). Ouch.
Miss out on the next best 10 days and your returns drop even further to 3.6% (Obviously, this is just one example).
So among other factors, the question is NOT "Can I see when the market is kinda close to the top and kinda close to the bottom" - the real question is: "Can I predict the 1 day every two years when I will get huge returns?" And then during the next bull/bear cycle, can you do it again, and again.... Because if you don't, you'll lose out on huge gains.
I'm doing my best to comprehend this but I must be seriously missing something. I'm looking at getting in and going out in say 5-7 year chunks and buying when it's plain as day when we are down and sell when it's all feeling good. Not in days or even months, but years. For example looking at S&P in 2009 everyone knew things were super bad even if you lived under a rock. If in 2009 to 2010 I bought in that time and just let it sit until today (2017) when almost everyone agees were out of the recession. It went from ~650 to ~2500. If I bought and it went down some more I'd not pull out but wait (I'm looking st this in years). Eventually it would go back up. If I was thinking of selling at the top here in 2017 but before I got to take it out it all tanked, I'd just wait until the next peak which maybe 5 years.
I guess what I'm saying is operate on roughly 5-7 year chunks, where I can eliminate big drops which would offset if I pulled out 2 years too early. If I totally missed it, dont freak out and stay in.
You are making some assumptions in your logic that are just flat out incorrect, and could cost you a lot of money.
Your number one assumption is that once the next recession comes, the market will drop to levels
below where they are today. It's very likely that this will simply not happen. Even if there is a recession next year, the market could have climbed another 10 or 20% before the drop. Then the drop may end up being more of a simple correction or prolonged stagnation that doesn't lower the price much at all. Oops.
Your second assumption is that once the drop does happen (if it happens), that you'll be able to buy at the bottom. It seems so simple. Wait for it to go down, then buy once it stops going down. Except, how do you know when it's done dropping? Will you buy in during a dead cat bounce? (Yes, I just wanted to use the term correctly in context.) Will you wait another week for things to keep dropping, only to see the market recover 5%? Then, you've just spend a year waiting on the sidelines hoping to get lucky, you actually did correctly predict the market movement, and you end up gaining, what, 5-10%? Those are pretty poor gains for such long odds, especially considering how much you stand to lose if this doesn't play out exactly as you hope.
People are biased because we're not far removed from two very large market crashes. What you're not realizing is that the crashes of 2002 and 2008 are not the norm. You can't expect to see huge 50% drops in the market. Rather, you're more likely to see reduced gains over a long period of time, with no large drops. Or, you'll see a 5 or 10% dip and then a steady march upward for another 5-10 years. If you're not in the market now, you will lose a lot of value by waiting, even assuming there is a 'correction' soon.