Author Topic: Buying post-correction  (Read 2724 times)

Axecleaver

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Buying post-correction
« on: May 15, 2015, 01:18:17 PM »
I've seen a lot of discussion about market corrections during accumulation phase, using that opportunity to buy cheap stocks in anticipation of a recovery run-up. I've also seen some folks mention that they would exchange their bond portfolio for stocks, and asset-allocate back to bonds at some future date.

Am I correct that this is just a market timing strategy? If we believe the market is expensive, what steps can take to prepare for a correction?

The CAPE measure seems like a helpful piece of information, but it's not great as a market timing indicator, and has been wrong before. Right now the CAPE is around 26.7 and seems very high.

MDM

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Re: Buying post-correction
« Reply #1 on: May 15, 2015, 02:13:07 PM »
Need to distinguish between "holding cash while waiting for a correction" (i.e., market timing) vs. "moving some money into equities after a market drop" (i.e., portfolio rebalancing).

On average the market goes up.  That's why "waiting" can be expensive in terms of lost opportunity.  But one can certainly take advantage of market drops if one has a portfolio that is not 100% stocks.

Does that make sense?

forummm

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Re: Buying post-correction
« Reply #2 on: May 15, 2015, 02:36:31 PM »
If you have an asset allocation plan that involves a certain percentage in bonds/cash and you stick to it, it will have you moving some of your bonds/cash portion into stocks if stocks tumble when you rebalance. But it's only some. I do see people on this board talking all greedily about how they would cash out bonds and buy stocks when the market tanks. But how will they know what the bottom is? That is definitely market timing. It's super easy to sell bonds for stocks when stocks go down 30%. But when stocks go down another 20%, you've burned your powder already. If you're retired, you are now selling some of those stocks you just bought at a loss to fund your spending.

In the accumulation phase, you can just keep purchasing every paycheck.

mizzourah2006

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Re: Buying post-correction
« Reply #3 on: May 15, 2015, 02:38:05 PM »
Need to distinguish between "holding cash while waiting for a correction" (i.e., market timing) vs. "moving some money into equities after a market drop" (i.e., portfolio rebalancing).

On average the market goes up.  That's why "waiting" can be expensive in terms of lost opportunity.  But one can certainly take advantage of market drops if one has a portfolio that is not 100% stocks.

Does that make sense?

People have been saying the market is due for a correction for over a year. If you were sitting on the sidelines you would be down about 15-20% right now.

Eric

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Re: Buying post-correction
« Reply #4 on: May 15, 2015, 02:52:00 PM »
I'm far from a market timer, but...

I do see people on this board talking all greedily about how they would cash out bonds and buy stocks when the market tanks. But how will they know what the bottom is? That is definitely market timing. It's super easy to sell bonds for stocks when stocks go down 30%. But when stocks go down another 20%, you've burned your powder already.

So what?  Why is it important to "call the bottom"?  Isn't using that "powder" at any point better than not?

forummm

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Re: Buying post-correction
« Reply #5 on: May 15, 2015, 03:00:30 PM »
I'm far from a market timer, but...

I do see people on this board talking all greedily about how they would cash out bonds and buy stocks when the market tanks. But how will they know what the bottom is? That is definitely market timing. It's super easy to sell bonds for stocks when stocks go down 30%. But when stocks go down another 20%, you've burned your powder already.

So what?  Why is it important to "call the bottom"?  Isn't using that "powder" at any point better than not?

Could be. But not necessarily. The part of my response you deleted (being in retirement) is one reason. Another is if the market continues to drop, you may have much less money and much more volatility than you expected--perhaps the reason you hold bonds/cash in the first place. And what if the market stays well below your purchase point for an extended period of time?

If you're holding bonds for portfolio stability and drawdown minimization, abandoning that during a crash increases your risk (the opposite goal of holding bonds). If you're holding bonds so you can time the market during crashes, studies show that the portfolio drag generally exceeds any benefit from market timing.

Eric

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Re: Buying post-correction
« Reply #6 on: May 15, 2015, 03:05:38 PM »
If you're holding bonds for portfolio stability and drawdown minimization, abandoning that during a crash increases your risk (the opposite goal of holding bonds). If you're holding bonds so you can time the market during crashes, studies show that the portfolio drag generally exceeds any benefit from market timing.

That's a good answer.  :)