Author Topic: Long term buy and hold - timing the market. Why is this a no no??  (Read 12145 times)

googooplex

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Ok I don't get this.

Suppose you want to put your money into an ETF. The plan is long term buy and hold. You plan to retire and start deriving an income from this within the next 5 or so years.

Markets historically work in cycles. Bottom > Rising> Top > Falling> Bottom > etc.

Currently most markets are at, or close to, historical highs by most measures. Price to Earnings ratios for instance.

So why is the standard advice for someone in this situation "don't try to time the market", that they should just buy now if you are ready and pay no regard to the current market P/E ratio, else be accused of trying to "time the market". Or, if the person is excessively nervous, dollar cost averaging is suggested.

But wouldn't many of you just wait for the next inevitable market correction? And then load up on ETFs at significantly lower prices? Even MMM himself seems to recommend this approach himself here -

http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/

I get that it's a pretty blunt and simplistic approach to timing when to enter the market, but can you really fault it for index investors?

Am I missing something??

more4less

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #1 on: November 06, 2013, 07:06:04 PM »
The fact that historic highs were beaten quite few times in the past.
« Last Edit: November 06, 2013, 07:42:28 PM by more4less »

brewer12345

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #2 on: November 06, 2013, 07:14:45 PM »
To put it bluntly, don't try to market time because you will almost certainly fuck it up.

KingCoin

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #3 on: November 06, 2013, 07:23:18 PM »
Evidently, a lot of people scared about equity levels right now as versions of this question keep coming up. I guess that almost daily "new market high" headlines will do that. The answer in short:

1) Is the P/E ratio on the high side now? Yes. Is it so high that is should keep you on the sidelines? No. http://www.multpl.com/

2) Strategies that invest when P/E ratios are low don't outperform buy-and-hold strategies.

But wouldn't many of you just wait for the next inevitable market correction? And then load up on ETFs at significantly lower prices?

The problem is that highs, lows, corrections, and bubbles are all obvious in hindsight. They're extremely difficult to see with foresight. The fact that almost no one is able to outperform the market on a long term basis is as clear testimony to this fact as any. Buying low and selling high implies you have this foresight. You don't.

The market rallied off the low from 680 to 1200 in about a year. At that point you could have said, "wow this market is red hot, I'm going to sit on the sidelines and wait for the next big correction". But now here we are at 1770. You would have missed out on an additional 50% return.

I think the heart of the MMM buying stocks cheap post is that when things go haywire, you need to apply a positive attitude (I'm getting stocks cheap!) rather than a panic and liquidate attitude.  I think MMM would be the first to admit that he can't beat the market.
« Last Edit: November 06, 2013, 07:28:21 PM by KingCoin »

korby

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #4 on: November 06, 2013, 07:34:59 PM »
Well, the problem is just the obvious one, that you don't know what the future holds.  So you don't know whether we're really at the market peak and about to crash, or whether it will continue on up for another five years.  When a crash actually occurs, on the other hand, you have a pretty good idea of what's happening, so maybe it's easier to know then that you're facing a good buying opportunity.  (But even then, you'll be wondering all the time whether we've hit the bottom, or whether there's further to drop.  So you really can't time these things.)     

But here's a thought that might help you decide.  I once saw on Vanguard a summary of a study that someone did, analyzing the returns investors earned when they invested all their money at once, or in little bits over time.  They found out that the ones who invested all at once did better.  To me this seemed counterintuitive.  I thought that it would be better to buy a little bit over time, dollar-cost averaging, so that you could essentially diversify your portfolio with respect to time.  The problem with this thinking is that the stock market isn't really random, since of course it has always trended upward over time.  So on average, someone who invested all-in right away, would have bought in at a lower level than someone who took the same money and invested it in bits over time.   Sop if you want to play the averages, it might be best to just go all-in.  The other thing to keep in mind is that there's an opportunity cost to waiting, since you miss out on dividends as long as your money's not invested.

Integrate

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #5 on: November 06, 2013, 07:58:19 PM »
Remember when using a metric like the P/E ratio that there are two variables that can change. One is the price (market correction) and the other is earnings. If earnings increase, PE ratio drops and the stock market remains the same price. This has happened in the past which is why the movement of the PE ratio and S&P/DJIA is not perfectly correlated with the movement of price level.

If you were going to time the market, you would need a way to know which change is going to occur.

deltaecho

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #6 on: November 06, 2013, 07:58:56 PM »
I'm generally a buy slowly and consistently kind of person, but I don't think that waiting for stocks to go down to a good price before buying is automatically a bad idea.  maybe it's best to invest consistently, but to save some money for when the really good sales happen.

if you wanted to buy a house you wouldn't just  ignore the price, and assume the value would increase just because all the neighboring house values would increase.  it would have to be a good value, and you should put work/money into it for the value to improve.  of course stocks are different, and jumping in to buy things and try to sell them a short time later would probably end up in failure unless you are super knowledgeable or just lucky.

i posted this article on a different thread, and sorry for putting it up again, but it really addresses this question.  it describes how smart timing of the market might make sense some of the time:http://www.marketwatch.com/story/you-really-can-time-the-stock-market-2013-11-04?pagenumber=1

kyleaaa

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #7 on: November 07, 2013, 11:26:34 AM »
Because market timing doesn't work. Why? Because recent price movements don't provide much useful information about future price movements. Everybody thinks it's easy to know when to get in and out, but nobody has ever been able to do it consistently. Go ahead and try it. It won't take you long to convince yourself market timing doesn't work.

Millions have tried, few (if any, I'm not aware of any but I can't say there's never been one) have succeeded. What makes you think you will? Market prices are essentially a random walk.

steveo

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #8 on: November 07, 2013, 12:42:21 PM »
i posted this article on a different thread, and sorry for putting it up again, but it really addresses this question.  it describes how smart timing of the market might make sense some of the time: http://www.marketwatch.com/story/you-really-can-time-the-stock-market-2013-11-04?pagenumber=1

I liked that article. To me deciding to invest when the market is lower and staying in cash when it is high is simply the smart option.

I also wonder if market timing gets such a bad reputation from traders rather than investors.

Iron Mike Sharpe

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #9 on: November 07, 2013, 01:11:35 PM »
i posted this article on a different thread, and sorry for putting it up again, but it really addresses this question.  it describes how smart timing of the market might make sense some of the time: http://www.marketwatch.com/story/you-really-can-time-the-stock-market-2013-11-04?pagenumber=1

I liked that article. To me deciding to invest when the market is lower and staying in cash when it is high is simply the smart option.

I also wonder if market timing gets such a bad reputation from traders rather than investors.

So what if the market keeps going up for 5 years?  How much are you losing in growth and dividends by staying on the sidelines?

iamlindoro

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #10 on: November 07, 2013, 01:18:51 PM »
I liked that article. To me deciding to invest when the market is lower and staying in cash when it is high is simply the smart option.

Not to call your statement out in any way, but this is more or less what a lot of people say and think about timing the market.  The fundamental truth, however, is that any analysis of the market is just as likely to be wrong as right.  Is the market "expensive" right now, or is it simply on its way to another new high?  If you opted to keep your money in cash in the early stage of the tech boom of the 90s, you would have lost all that opportunity for gain.  Moreover, you would have lost money keeping it in cash as inflation ate away at it.

One might counter that with an argument that "There's no sign of a world-changing technology at the moment," but one could have just as reasonably claimed the same in the late 80s/early 90s as computers (even home computers) had existed for decades and it hadn't run the market up.  There's simply no way to establish that the market is "too expensive" or "cheap" with any degree of confidence.  If you're right with your guess, you might make money.  If you're wrong, you might lose a lot or lose out on a lot.  But your guess on the state and direction of the market in the future is only as good or bad as anyone else's coin flip.

KingCoin

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #11 on: November 07, 2013, 01:24:06 PM »
To me deciding to invest when the market is lower and staying in cash when it is high is simply the smart option.

I agree. You should be buying now while the market is low and selling later when it's high.

dcheesi

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #12 on: November 07, 2013, 02:16:53 PM »
Allow me to be your poster boy for failure...

A year ago I started reading this blog and wanted to move a chunk of change into Index funds. But my "stock wiz" buddy warned against it; he was so certain that the S&P was headed for an imminent crash that he was actively betting on it via short selling.

Fast forward six months; I'm still on the sidelines, and my buddy has lost his shirt on those bad bets. But at that point the S&P was already at a "record high", so I decided to wait a couple of weeks and see what happened... Months of distraction and procrastination later, and I'm just now in the process of setting up a Vanguard account and moving some money over.

By now I've missed out on 20%+ gains. Even if the market crashes now, I'm still worse off because I've missed that built-up cushion. And it's all because I tried to time my entry into the market.

jcandoitbig

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #13 on: November 07, 2013, 02:23:30 PM »
Even MMM himself seems to recommend this approach himself here -

http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/

he means that you should always be investing in the market, just double your efforts when it's crashing, as stocks are "on-sale" at that point. For instance, if you had invested your money right before the recent crash, your first thought shouldn't be to panic and sell like everyone else, but to buy more and more!

Integrate

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #14 on: November 07, 2013, 02:47:12 PM »
i posted this article on a different thread, and sorry for putting it up again, but it really addresses this question.  it describes how smart timing of the market might make sense some of the time: http://www.marketwatch.com/story/you-really-can-time-the-stock-market-2013-11-04?pagenumber=1

I liked that article. To me deciding to invest when the market is lower and staying in cash when it is high is simply the smart option.

I also wonder if market timing gets such a bad reputation from traders rather than investors.

As I mentioned in the other thread where this was posted, if you used the values he proposes (PE10 and q ratio) to determine when prices were low, i.e. below average, you wouldn't invest very often in the past two decades. Since 1990 there exists two time frames when the S&P index was below average based on these metrics. You'd miss out on a whole lot of gains if that were your strategy.

acroy

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #15 on: November 07, 2013, 03:02:37 PM »
This is very much IMHO, YMMV, all the usual disclaimers:
-many signs that the market is bubbly
-it may well go higher, but many signs that the fundamentals are eroding
-Counterpoint; market cap growth almost exactly matches Fed purchasing, and Fed is not slowing. So a valid opinion is to stay all-in till Fed blows the whistle

My humble suggestion –
Assuming you are sitting on all-cash, start dollar-cost averaging say 5% of your ‘stache into the market per month. Then just keep doing it as cash becomes available.

I have also read pros & cons of dollar-cost averaging vs. all-in. All-in is a blind dart throw. Dollar-cost lets market volatility work for you. I've done this with no breaks since 2001 in my 401k and it has worked out very nicely indeed.

#1 rule: make a plan you are comfortable with, write it down, execute it. Stick to it. When in doubt, go back and read your plan!

FYI there is some very nice buy-and-hold analysis here:
http://www.marketwatch.com/story/the-ultimate-buy-and-hold-strategy-2013-07-17?pagenumber=1

and the Lazy Portfolios (buy-and hold also)
http://www.marketwatch.com/lazyportfolio?siteId=

best o luck!

rogar

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #16 on: November 07, 2013, 05:27:23 PM »
For a detailed explanation you should probably get a copy of one of the classic investment books like The Four Pillars of Investment or A Random Walk Down Wall Street.  My simplistic thinking has always been that there are stock brokers who study the market day in and day out for years.  They don't make their money in the market, but off their investors.  Only a handful of gifted or lucky people like Warren Buffet seem to have a knack for it.  It is why most experts suggest index funds rather than managed funds.  Over the long run the managed funds where people try to predict things just don't do any better.

I have a relative who is a certified financial planner and currently in an MBA program through the Wharton Business school.  Every year when I see him at Christmas I ask an investment recommendation, more in a fun way than serious.  He does not have a good performance record.  Last year he recommended gold mining stocks.

I also like the other explanation someone offered...you'll almost certainly hose it up.  I know I have.

Cyrano

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #17 on: November 07, 2013, 08:57:42 PM »
For the sake of argument, let's accept the Shiller data for what it is. It says that if the future is like the past, if you buy the S&P now and hold it for 10 years, the best estimate of your future returns is something like 2% per year after inflation. This isn't great, but if you buy a 10 year Treaury bond now, you can expect about 0% after inflation. Or you can hunker down in cash for 10 years at -2%.

So you can say that stocks are expensive, and there have been better times than the present to be an investor. So maybe you should pad that 4% rule if you're thinking of retiring right now.

What the Shiller data doesn't say is that there will be a significant near-term correction that will be a better time to buy stocks. Sure, it's too bad to buy high, but you may not have a better opportunity to buy low.

bigchrisb

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #18 on: November 07, 2013, 10:58:47 PM »
On paper, I'm supposed to be a buy and hold investor.  In practice, I've more than dabbled in market timing.  I've used a lot of margin (with all its inherent risks and margin calls) over the last few years, and in general have been lucky in that I geared up during the GFC.  I'm currently in the process of slowly unwinding some of the gearing.

My own philosophy in this is that its always a good time to own stocks, and that I can't pick tops.  Hence I'm not interested in selling stock.  However, there are times when stocks do seem to be a screaming bargain, and I'm prepared to go into debt to buy additional stock at these times. 

Has it worked?  Sometimes.  At the moment I'm better off than if I'd been buying in regularly each month.  However, there were times when I bought on margin too early, got margin called, and had substantial erosion of value.  These are also the times when I should have been buying even more, rather than forced selling.

At the moment, I'm trying to pay down my margin debt without selling stock, such that I've got more dry powder for the next time stocks look to be a bargain.  And on the plus side, I'm remaining fully invested.

steveo

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #19 on: November 07, 2013, 11:33:20 PM »
i posted this article on a different thread, and sorry for putting it up again, but it really addresses this question.  it describes how smart timing of the market might make sense some of the time: http://www.marketwatch.com/story/you-really-can-time-the-stock-market-2013-11-04?pagenumber=1

I liked that article. To me deciding to invest when the market is lower and staying in cash when it is high is simply the smart option.

I also wonder if market timing gets such a bad reputation from traders rather than investors.

As I mentioned in the other thread where this was posted, if you used the values he proposes (PE10 and q ratio) to determine when prices were low, i.e. below average, you wouldn't invest very often in the past two decades. Since 1990 there exists two time frames when the S&P index was below average based on these metrics. You'd miss out on a whole lot of gains if that were your strategy.

I wonder if you are right here from a statistical or mathematical perspective. If you invested at certain ratios but at that point threw all your cash into the market how would it turn out.

I don't have the data myself but I think that people that are highly focussed and have a clear plan in place tend to do well in the markets. I trade foreign currency. I tend to buy or sell and the market goes against me straight away however I've had some good trades from stating I'm only going to short the USD at a certain rate and I'm going to hold onto it until it goes up say 10%.

Forex will never be something that I make a living off however I will invest in equities in a significant way. I just think that having some value indicators to when you invest will help you over a 20-50 investing career. If you buy at the wrong time it can take a long time to get that money back.

Another point I'd make is that maybe asset allocation strategies work well simply because they get you out when a market is dear and get you in when a market is cheap/
« Last Edit: November 07, 2013, 11:36:40 PM by steveo »

Integrate

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #20 on: November 08, 2013, 07:15:33 AM »

As I mentioned in the other thread where this was posted, if you used the values he proposes (PE10 and q ratio) to determine when prices were low, i.e. below average, you wouldn't invest very often in the past two decades. Since 1990 there exists two time frames when the S&P index was below average based on these metrics. You'd miss out on a whole lot of gains if that were your strategy.

I wonder if you are right here from a statistical or mathematical perspective. If you invested at certain ratios but at that point threw all your cash into the market how would it turn out.

So you made me curious and I decided to check.

These are the assumptions I made:

Interest was done on a monthly basis.

Interest for buy and hold was simply the monthly delta on S&P500 adjusted (with dividends).

Interest for market timing was (1 year t-bill rate + 0.5%)/12. The rate was constant for that year (i.e. all of 1990 had the same rate). The .5% fudge factor was due to current rates being very low and I was trying to approximate a high yield savings rate on the assumption that the market timer would have to have their assets liquid to be able to jump into the market when the opportunity presented itself.

Each investor contributed $1,000 a month starting Jan 1, 1990 going until Nov 7, 2013.

Buy and hold investor simply put the $1,000 in and let the market do its thing.

Market timer only put money in the stock market when the Shiller PE ratio was below the current average Shiller PE ratio. Note that use of the current PE ratio means I may have invested in a couple places that the actual user wouldn't have since the mean has raised every so slightly recently. I don't think this should make any significant difference given the mean includes over 100 years of data.

If the market timer was not putting money in the stock market, they earned the "safe" interest rate.

Once the market timer put money in the market, they did not sell. The rational here is that by using the Shiller PE as a metric they are buying when they expect the returns to be high, so they will hold the stocks to obtain the expected returns. Using a simple metric such as selling when above average wouldn't tell us anything useful (the market timer would not make good money), since they would only hold a few months.

One could argue for a sell metric such as sell when the Shiller PE is 1, 1.5, 2 SD above normal. I may check this in the future, but right now I don't have the time. I would argue against any "sell at peak" rational as that requires omniscience on behalf of our investor.

The market timers investments ended up looking like this:

From Jan-1990 to July-1990 investor was earning safe interest.

From Aug-1990 to Jan-1991 the market timer invested all his accumulated money and all further contributions into the S&P index. This money was left in the S&P index until the end (Nov-2013). (group 1)

From Feb-1991 until Sep 2008 the market timer was investing only in safe assets.

From Oct-2008 until Jun-2009 the market timer put his second accumulated stash and all subsequent contributions into the S&P index. (NB he did lose money here since he did not enter at the bottom. As before I would argue against entering at the bottom as that requires as much omniscience as exiting at the top). This money was left in the market. (group 2)

From July-2009 until the end the market timer invested in safe assets. (group 3) The total of these 3 groups of money were added up at the end.

Results:
Buy and hold: $633,365.84
Market Timer: $616,359.67


So the market timer achieved 97% of the amount of the buy and hold strategy. There may be a chance to exceed it by using some "exit at X standard deviation above mean" strategy, but I don't have time to run that right now.

Psychologically, the buy and hold is much easier to maintain. It would require great discipline to follow the market timing rules without thinking you can beat them and missing the opportune times to invest. That work is also for a lower return.

If anyone has problems with my safe interest rate assumption, I understand, but there's only so much time I was willing to spend looking for data I could use. Ideally I'd use a savings account or MMA interest rate, but I couldn't find the level of granularity that I needed. If someone else can, it shouldn't take me long to rerun the numbers as it's just changing 1 column in the excel sheet.
« Last Edit: November 08, 2013, 07:17:35 AM by Integrate »

arebelspy

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #21 on: November 08, 2013, 07:20:33 AM »
Thanks for that post Integrate.  Very neat.
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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #22 on: November 08, 2013, 07:28:00 AM »
/slow clap

beltim

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #23 on: November 08, 2013, 09:23:08 AM »
Integrate - simply great post, and great calculation.  I was going to ask you to run some additional scenarios, but instead of making you do yet more work, is there any chance you could share the spreadsheet you used for your calculations?  I'd very very interested in running some scenarios myself.

rogar

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #24 on: November 08, 2013, 01:03:29 PM »
I think the most recommended buy and hold philosophy holds to rebalancing to a target AA at a regular interval, which in a remote way encourages you to sell when the market is high and buy when it is low to meet your target allocation.  I have seen figures comparing a pure buy and hold to a buy and hold, but rebalance annually.  The rebalance comes out ahead.

I have screwed up my share by incorrectly thinking I can predict the market, but right now it is awfully temping to manage one's bond funds with the expectations that interest rates are going to rise.  I have shortened the duration of my bond funds and plan to rebalance into money market in the near future.  Goes against the buy and hold philosophy and could be the wrong approach.


Integrate

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #25 on: November 08, 2013, 01:12:01 PM »
Sure, nerding out here a bit. This spreadsheet is a bit sloppy. I whipped it up this morning so I didn't use best practices making it. The market timing was calculated in 3 columns for the 3 groups instead of doing it all in one column. Oh well.

I have poor use of range names too, so it may be hard to follow where some of the data is coming from, but hopefully not to bad.

I have a conditional format in column G that turns the cell green when the PE10 is less than average. You can set up other ones for visual clues too. If you aren't sure how to use conditional formatting, look at the one I made and if you still need help ask me here.

The second tab is all the PE10 information (I only used from 1990 for this trial, but the whole thing is in the second tab. If you want the same range of S&P500 data or DJIA, yahoo should have the entire thing). I put a histogram in and it appears to be roughly lognormally distributed. This seems close enough to correct since the PE10 has never been below 2SD from the average, but has on occasion been more than 2SD above the average (long positive tail).

I put both the resulting PE10 +/- 1SD and +/- 2SD and their associated probabilities based on a histogram with bins of 1 unit. Should be precise enough for this type of work.

Blah blah don't base your future off this; I'm not making any guarantees about market returns and all that nonsense.

Remember that if you want to change the save interest rate, it needs to be entered as a monthly interest rate. Yes, I realize I called it market time and not marking timing. You'll just have to deal with that. Market time is when the clocks randomly go backward and forward and you have no fucking clue what's going to happen next... or something. I'll stop trying to be funny.

steveo

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #26 on: November 08, 2013, 02:35:59 PM »
Thanks for that analysis integrate. I agree with the approach that you have listed - i.e. buy when the market is low but don't sell and do not try and pick the bottom.

Interestingly despite not putting in any money into the market from Feb-1991 until Sep 2008 the market timer is not really far behind from a % viewpoint. This is a long time to be out of the market and to be in safe assets. To me this says that there is a lot in value investing.

I feel that rotating between different asset classes with a value based approach but with a focus on equities is the approach that I will take. At the moment for me personally paying off the mortgage is the best option. Once that is complete I will reassess and plan based on the value that is available within all asset classes excluding property. I'm heavily invested in my house already and I don't need any further allocations to property. The only problem I can see with this approach is the amount of free money available which may mean that all asset classes look like they are historically expensive when in reality they aren't expensive.
« Last Edit: November 08, 2013, 02:39:22 PM by steveo »

Cyrano

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #27 on: November 08, 2013, 04:31:45 PM »
Also fun to observe: although the steady-investor's stash is more volatile than the market-timer's over this period, the steady investor never has less than 91 cents on the market timer's dollar (at the bottom of the dot-com crash), and usually has had better returns than the timer.

Integrate

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #28 on: November 08, 2013, 08:38:09 PM »
Thanks for that analysis integrate. I agree with the approach that you have listed - i.e. buy when the market is low but don't sell and do not try and pick the bottom.

Interestingly despite not putting in any money into the market from Feb-1991 until Sep 2008 the market timer is not really far behind from a % viewpoint. This is a long time to be out of the market and to be in safe assets. To me this says that there is a lot in value investing.

Yes there is a huge amount of gains to be had assuming you can value invest well. Best example of a value investor is Warren Buffet. Obviously he's very good at it. I don't think I'm that good, so I won't try. My personal philosophy is to buy and hold because psychologically and practically it's very easy and works pretty damn well.

That being said, I wouldn't think someone is totally crazy if they upped their allocation of cash right now, but still kept a position in the market. I agree with Buffet that bonds are not a good way to go right now. There is limited upside since rates can't get much lower and a lot of potential downside if and when rates increase.

There's also the time value to all of this. If you hate following markets and doing things like the spreadsheet I just ran, buy and hold wins by miles. If you like looking around, there may be some rules you can set for yourself to do better without a high opportunity cost on time.

Just another point, one has to be careful when constructing rules based on the past. For example there's a lot of room for improvement here if the market timer doesn't invest all at once, but invests the money over a small time period. In both cases when he puts his accumulated stash in, he is losing money for about half the periods he is in the market.

So logically one may set a rule to take a position more gradually in the market, but one does not know how long the down side is going to be. If it's very short, one may miss the opportunity to invest.

Another relevant point here is that after a decade and a half of safe investing, it's probably pretty hard mentally to hop into the market and watch your wealth drop by a third. At least, it would be for me.
« Last Edit: November 08, 2013, 08:48:36 PM by Integrate »

dadof4

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #29 on: November 08, 2013, 09:44:01 PM »
Link of interest: http://www.fpanet.org/journal/BetweentheIssues/LastMonth/Articles/MissingtheTenBest/

TL;DR: most market advances happen in short spurts. If you miss those advances while attempting to time your entry into the market, you miss the gains you would have achieved through disciplined, regular investments.
Actually, it says something different. While technically true that missing the "best" market days is bad, it is very very good to miss the "worst" days - which is why the former is a misleading statement for financial advisers to use it to convince people to buy and hold (possibly unethical).

There are good reasons for buy and hold, but this is not one.

chasesfish

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Re: Long term buy and hold - timing the market. Why is this a no no??
« Reply #30 on: November 09, 2013, 06:08:46 AM »
I'm supportive of slightly timing the market...

Keep a small chunk of your portfolio in cash, then when the bear rears his ugly head, throw money at him until he goes away.

When stocks start looking expensive, I pay down debt more every month instead of investing additional money.