It has been said around here that people get happy when their investments go down (in their wealth accumulation phase), because that means the stock market is on sale, etc. If one takes this to its logical conclusion, a 28 year old like me with an investment time horizon of forever should target buying things that have a gloomy outlook for the next 5-10 years. This assumes that one regularly invests during these down years.
Here is an example. A lot of people say don’t buy long term bonds because interest rates are historically very low and likely to go up. Let’s say I think that sounds like a reasonable prediction. I’m looking at BLV and thinking, this thing has to go down for a while when interest rates rise. It looks like it is already happening. I’m going to automate a $100/mo investment forever and smile when bonds are the hot thing again in like 20 years or when interest rates get slashed in the next economic crisis.
I suspect there is something fishy with this kind of long term strategy. It feels like market timing. Business cycle timing? Does missing out on high average yearly returns overwhelm potential benefit? Please poke holes and maybe I can learn something.
Hi, I think you are misinterpreting the strategy.
The reason people think that bonds will have a gloomy outlook for the next 5 to 10 years is because they are very expensive now. Whether or not their price will go up or down depends on interest rates which in large part depends on the economy and fed policy.
Now, if
a) you think that bonds are fairly priced now,
b) you think that value of bonds will be higher in 10 years or so
c) but meanwhile, say in the next 5 years, bond prices will go down (interest rates will go up)
d) and you plan on saving and buying during those five years
Then you will get a positive return.
The main question to answer is -- will whatever it is you plan on buying be worth more at point B than at point A -- if yes, then every lower purchase you make at point(s) C is just gravy.
Personally, I would not try this with bonds now. They are just too expensive. It is entirely possible that in 10 years the rate on ten year treasuries will be lower than it is now -- say 1% as it is in Japan, and hence point B will be worth more than point A (plus the C gravy) -- but I doubt it. If interest do go down -- then the economy will be worse. In effect you are better against America.
Where this strategy works wonders, in my opinion, is in stocks of individual companies.
I don't believe I can time the market -- but I also don't also believe in EMH. If I see a company I really like selling for a good price, I buy it. If next month I see it selling for a better price I buy more of it. In the end the returns are huge. I have done this with two companies for periods of years -- prices were dropping until they were not -- and in the process of doing this again now with another company. If the price of the current company that I am buying will continue to go down, and the actual business continues to improve I will be very happy.