"If the market drops, I'll buy!" Market timing?

[Villanelle]

I'm amazed at how many versions of, "I know timing the market is bad, but should I time the market in X way?" we see around here.  And generally the responses are, "don't try to time the market."

But there is also a lot of, "if there is a market drop, I'll shovel every penny I have into the market while stocks are on sale."  Isn't that also market-timing?  Are the potential pitfalls about the same as selling because you think "top is in" or not investing that bonus you just got because prices are sure to drop soon, or all the other versions of market timing? 

You leverage or forgo a vacation or empty the sofa cushions tomorrow because the market is down 9% in one day; can't it drop any other 5% or 10% the following day? 

Why does timing the market when it's low seem to get a free pass that timing it when it is high doesn't?  Am I missing something?

I get that there is nuance when it involves supposed "extra money", but if you are investing money you otherwise would have left in the sofa, you are making a decision based on market-timing, not a pre-determined, market-agnostic plan.  And I suppose one could argue that whatever causes you to get time in the market with that money is a good thing.  So maybe part of the answer depends on whether this is money you truly would have left being grossly inefficient, like the couch cushions or the beanie baby collection you finally get around to liquidating in order to buy in, or whether it's money you have to shift around like booking your July vacation, which you will go on anyway, in two weeks instead of tomorrow.  Or if you actually leverage to buy-in during the "sale". )

So, am I missing something about this that makes it different?  (And no, that's not rhetorical. I'm not a nuanced market numbers person like many of you so I figure chances are decent that I *am* missing some element. 

[MustacheAndaHalf]

What I see most is "time in market beats timing the market".  Even people who wait to buy the dip have a problem: they're waiting in cash, and probably ignoring the difference in returns between cash and equities.  What happens if there's no dip?

Some people may not be able to do that, so you could at least try to get them avoiding "buy high, sell low".  I forgot if it's Schwab or Fidelity that studied market returns vs 401(k) account returns, and found a wide gap.  People chased high performing index funds (at a high point), then panicked and sold at a low point.  Convincing those people to change behavior is also beneficial, even if they don't remove market timing from their behavior completely.

[maizefolk]

I think the difference is that people are making extra spending cuts they aren't willing to accept long term, because they're convinced it's a particularly good time to buy when the markets are down a lot.

Imagine the case of a couple who has decided they want to go on an expensive vacation every year. Then the stock market crashes and they decide they're willing to forego that year's vacation to put more money into the market. It may or may not actually be a better time than average do so but any time is a good time to forego unneeded spending and invest.

Inherently skipping a vacation to put more money is going to leave them financially better off, so the fact that it is a market drop which caused them to be willing to do so doesn't concern me.

[bacchi]

What maizeman said. You hold off on major purchases for a year or two in order to get that 20-30% deal.

I believe @Nords ? did this during the 87 crash.

[shinn497]

What is worse about the "Buy the dip" mentality is that dips are often interpreted as recent drops in the mark. It is a huge cognative bias toward sharp declines in the market with the expectation that they will soon rise.

People that often buy dips ignore when large recessionary drops come. And they also ignore that these dips come after large gains. This is why there is so much evidence that timing the market doesn't work.

But yes. OP hit the nail on the hammer. You should never base an investment strategy on the performance of the market. While you can plan financially, such as using the CAPE ratio to determine your safe withdrawal rate. Or evaluate investing vs buying a home. These decions should result in consistant reactions and be long term.

I also have a suspicion that shying away from the market and believing you can time it is related, in general, to irrational investing behaviour. I am curious if this is researched, but I have a hypothesis that irrational decisions are correlated. E.G. Irrationally believing you can enter the market at the right place makes you more likely to irrationally pull out if it doesn't drop when you want to.

[harvestbook]

Yes, a host of biases at work, and for little potential gain if you play it (guess) perfectly:
"Buying only at the absolute bottoms from 1970-2019 would outperform DCA by about 22% in total, or 0.4% (40 basis points) annually."
https://ofdollarsanddata.com/why-market-timing-can-be-so-appealing/

(0.4 outperformance is nice, but you can get more than that by upping the equity portion of your AA by 5 percent and doing nothing else).

I used to hold lots of cash because it felt more secure and I was still learning, but soon realized the cash made absolutely no difference in my life and a market crash would make no difference in my life, either. Now I turn over couch cushions no matter the market level, and every spare dime goes in as soon as possible.

Because I know I am an irrational human with tons of biases, I forcefully remain agnostic on the markets.

[JAYSLOL]

I buy the dips, but I don’t wait to buy the dip.  I buy every week on a regular schedule, but if there’s a sharp drop I often double check what I can squeeze in a little early.  Its too much work and stress normally to make sure every cent is invested the instant it becomes available, but for example when there was a sudden drop in December, 2018 after a few months of a slow decline, I went into my accounts and made sure everything I could was invested right away.  If you want to call it market timing, sure I guess, but since all of that money was going to be invested soon anyway on a regular schedule, I prefer to consider my approach “Passive DCA, with some micromanagement when dips occur”. 

[GoCubsGo]

I agree that it's definitely market timing.  I read a lot of fund managers predictions and post mortems on the past financial quarter and they often talk about cash on the sidelines and waiting for opportunity.  These are brilliant minds with tons of research available.  Not that it makes it right, but it's interesting.

I'm personally waiting for a 20%+ drop to make an allocation change in my kids 529 plan.  If the market drops I will flip the allocation from 80/20 Bonds/Equities to the opposite.  I figure if the market recovers in the 4-5 years before I need to use it I will have come out ahead.  I will set a pre-determined % of gains at which point I will take the winnings off the table and reset the allocation back to fixed income.

Total market timing and there is a definite risk, but one I can handle if I'm wrong.  To each their own and I think most people innately know they are trying to time the market by holding off on investing.

[thesis]

During the the first wave of the late 2018 dips, I borrowed from my own cash savings to finish maxing out my Roth IRA. I was sad when the second dip happened, as I could have gotten a much lower price (and therefore more shares for the same money), but there was no beating the fact that suddenly everything had gotten cheaper, and I still felt I got a good deal on what I did buy. It just came at the slight risk of having skimmed a few grand off of my cash stash.

In retrospect, I came out ahead that way, but how much the difference really mattered I don't know. I personally keep a cash stash, and seeing the market down has occasionally convinced me to dump some of that into investments. It's still market timing, though, and that's why some people forego a cash stash entirely. This year I just immediately took money out and maxed my Roth IRA. I think doing it this way is better than how I was doing it before.

[RWD]

A large market drop can be a good time to rebalance (your investment policy statement should include thresholds for this). So even if you don't have anything extra to contribute you could sell some bonds to buy more stocks, bringing you back to your desired asset allocation.

[Nords]

I'm amazed at how many versions of, "I know timing the market is bad, but should I time the market in X way?" we see around here.  And generally the responses are, "don't try to time the market."

Why does timing the market when it's low seem to get a free pass that timing it when it is high doesn't?  Am I missing something?

So, am I missing something about this that makes it different?  (And no, that's not rhetorical. I'm not a nuanced market numbers person like many of you so I figure chances are decent that I *am* missing some element.

What maizeman said. You hold off on major purchases for a year or two in order to get that 20-30% deal.

I believe @Nords ? did this during the 87 crash.

The 27-year-old newly-married Nords of 1987 had no clue about asset allocation, other than to put every spare dollar of our dual-military paychecks into equity mutual funds. 

The 1987 crash was quickly labeled a glitch of program trading ("portfolio insurance"), much like the flash crash of a few years ago.  Everyone "knew" that the crash didn't reflect the economy or the stock market's typical volatility.  Fortunately that turned out to be correct.

When the crash happened, my spouse and I were students at graduate school.  The week after the crash, the campus was practically a ghost town.  After a couple days of this eerie quiet we learned that the absent students who fancied themselves as big swingin' traders were spending their days at home on their (landline) phones, frantically dialing their brokerages' toll-free numbers to place buy orders or to wire more funds to their accounts. 

Back then we were impressed by the prescient behavior of people who seemed to know a lot more about this than we did.  We scooped up whatever we were planning to spend for that month's entertainment budget, wrote out the checks, and mailed them to our Fidelity accounts.

On the other hand during the market declines of 1990, 1998, and 2000-01 we knew that the economy would never recover and the stock market was going to zero.  If we'd tried to take advantage of all those monthly (weekly!) sales opportunities then we would've given up after about three months.  Fortunately during those times we were busy with DESERT STORM, parenting, and then with retirement preps. 

By the time of the Great Recession we had more investing experience (and more emotional experience).  By this point we were living off our investments at the 4% SWR (with some variable spending).  We'd had a clearly-articulated asset allocation since 2004.  We'd kept a cash stash of two years' expenses to handle the sequence-of-returns risk of the first decade of retirement.  We knew enough to keep that AA, spend down our cash stash, and just take the tax-loss harvesting every few months as we hit our rebalancing triggers. 

Yet once again by early 2009 we were absolutely positive that the economy would never recover.  We were sure that a double-dip recession would go for a triple dip and stay with the type of stock market that we'd seen in 1966-82.  (In Hawaii we were also convinced that America was emulating Japan's "lost decades" of their 1990s and 2000s economy.)  Our cash stash was nearly gone by early 2010 and we were selling shares for living expenses, not just to replenish the stash.  This time we were rebalancing by taking a little cash out of the markets, not simply selling one part of our AA to buy another part.

Today we've moved most of our investments into a total stock market index fund.  (It'll take a few more years to finish the process in a tax-efficient manner.)  It pays the dividend rate of the stock market, and we've just been sweeping the cash into our checking accounts for spending. 

I can appreciate anybody's bold talk about buying shares when they're on sale.  The problem is that when the sale starts, everyone still thinks that everything is at least 20% too expensive and nobody wants to be too early to the real sale.

 

[Giro]

I wouldn't say I time the market, but if there's a big dip, I'll throw some money into it that I wasn't planning on investing. 

[Davnasty]

I wouldn't say I time the market, but if there's a big dip, I'll throw some money into it that I wasn't planning on investing.

But what exactly is money that you weren't planning on investing? Your emergency fund? Your stated AA for cash? Money set aside for a purchase that you will now forgo temporarily?

In any case your borrowing from some pot of money that was allocated for something other than investing, right? Then you'll presumably fill that pot back up with future earnings which means those earnings will not be invested. So you've decided to invest now rather than the future day when you put money back into the pot you borrowed from. Aka, timing the market.

ETA: I really was asking Giro what they meant by their comment, not trying to make assumptions or correct anyone.

[PDXTabs]

Money set aside for a purchase that you will now forgo temporarily?
...
Aka, timing the market.

I think that depends on what I was going to spend the money on. If I take my investment dollars in and out of the market that's market timing. If I choose to forego a vacation because the market is on sale that's me changing my mind on what to spend my money on.

[maizefolk]

In any case your borrowing from some pot of money that was allocated for something other than investing, right? Then you'll presumably fill that pot back up with future earnings which means those earnings will not be invested. So you've decided to invest now rather than the future day when you put money back into the pot you borrowed from. Aka, timing the market.

This seems to be the crux of why different people see the answer to this question differently. Are folks borrowing from some other pot of money? [Money that either ultimately will need to be paid back, or that they had let build up in cash because they thought stocks were "too high"]

Or does the decline in the stock market make them emotionally more willing to forego consumption in favor of savings/investment?

[Davnasty]

Money set aside for a purchase that you will now forgo temporarily?
...
Aka, timing the market.

I think that depends on what I was going to spend the money on. If I take my investment dollars in and out of the market that's market timing. If I choose to forego a vacation because the market is on sale that's me changing my mind on what to spend my money on.

Yes, so the one case where it's not clearly market timing, is when you take money from the pot which was intended for a purchase and then completely forego that purchase without ever refilling the pot, as maizeman described. If you take that vacation later because you didn't take it today, we're back to square one.

Personally, I might still call it market timing whether you refill the pot or not because you made a "timed" decision based on the state of the market, but it's not necessarily the bad kind of market timing.

[PDXTabs]

Personally, I might still call it market timing whether you refill the pot or not because you made a "timed" decision based on the state of the market, but it's not necessarily the bad kind of market timing.

I'm not sure that it matters, but investopedia says that [m]arket timing is an investment or trading strategy in which a market participant attempts to beat the stock market by predicting its movements and buying and selling accordingly.

If I forego an expensive product (vacation/dinner) to buy a cheap product (stocks/happy hour), I'm not sure that my behavior would rise to that definition.

[robartsd]

In any case your borrowing from some pot of money that was allocated for something other than investing, right? Then you'll presumably fill that pot back up with future earnings which means those earnings will not be invested. So you've decided to invest now rather than the future day when you put money back into the pot you borrowed from. Aka, timing the market.

The adage is "time in the market beats market timing". Foregoing future investments to replenish a fund that you borrowed from to invest on a dip increases time in the market. Even better if you simply decided to cut some discretionary spending instead of foregoing future investments.

[Davnasty]

In any case your borrowing from some pot of money that was allocated for something other than investing, right? Then you'll presumably fill that pot back up with future earnings which means those earnings will not be invested. So you've decided to invest now rather than the future day when you put money back into the pot you borrowed from. Aka, timing the market.

The adage is "time in the market beats market timing". Foregoing future investments to replenish a fund that you borrowed from to invest on a dip increases time in the market. Even better if you simply decided to cut some discretionary spending instead of foregoing future investments.

True enough, in the case of postponing a purchase you have increased the time that those dollars spend in the market even if you eventually make the purchase.

In the case of using your emergency fund however, you're taking some amount of risk that you will need that emergency cash before the pot is refilled. Does it meet the definition of market timing from investopedia? If said emergency causes you to sell investments to cover the cost then yes. If it only results in personal discomfort, then no.

In the case of taking from your cash allocation you are market timing in the traditional sense.

[robartsd]

True enough, in the case of postponing a purchase you have increased the time that those dollars spend in the market even if you eventually make the purchase.

Yep. You might even increase the time without postponing the purchase. Say you've decided to save up $10,000 for something at $100/mo and you also invest $100/mo in a taxable account. Say the market dips when you have $5,000 saved. You could choose to invest the $5,000 on the dip then forgo the $100/mo you would normally invest so that your could reach the $10,000 on original schedule. On average, the $5,000 spends 25 weeks longer in the market, but the purchase date does not change.

[ChpBstrd]

Any rebalance that occurs when the market is correcting would be “buying on the dip”. Rebalancing is an attempt to maintain an AA, but it still exploits offsetting dips and peaks in a portfolio’s weakly correlated assets.

I’ll take it a step further and say my AA would be a lot more aggressive if so many valuation metrics weren’t in the 99th or 100th percentile of their historical range.

I do not agree with the following analysis, but I find their data points intriguing:
https://www.crescat.net/bear-market-looms/

[Buffaloski Boris]

Is buying a drop in prices market timing? Sure.

Do I care? No.

I don’t have the same aversion to market timing as many do. It’s incredibly difficult to do it well if your plan is to buy low and sell high, but if buying a drop is what gets you in the market for the long term, what does it really matter? The idea is to be invested.