I tried to time the market: Roast me and tell me what to do now.

[Maturin]

Title says it: I pulled out a sizable chunk of my index fund holdings a few months into the pandemic, after the market had recovered from the initial shock. I thought there would be a widespread economic collapse once people started defaulting on mortgages throughout the country. Obviously, that didn’t happen (or hasn’t yet), and the money I left in the funds has appreciated 73% since.

Fortunately for all of you and unfortunately for me, the prices of essentially all investments have skyrocketed. Home prices have skyrocketed in my area, stocks are through the roof, even bond indexes seem to have gone way up. Gold is up. Bitcoin is up.

So my question is, what am I supposed to do with all this cash? My solution so far has been to set a more aggressive automatic investment each week to reinvest everything quickly, but not too quickly, over the course of the next 12-18 months.

I’ve also been looking at a private equity opportunity which I think is probably less affected by the stimuli and other weird inputs that are affecting the prices of public investments.

Save me from my bad decisions.

[use2betrix]

Interested to hear the responses here..

You deserve face punches, but you know that.. Hopefully it’s a lesson learned and you can get some good feedback here on a path forward.

Personally, and I would hate to make this decision, I would likely pick a number in the market to wait for it drop to that and dump it back in.. I’d be amazed if it never drops to around 15% below from where it is now, but with that being said, practically NO ONE would have predicted the last 8 years in the market.. let alone 4 years, of even the last 4 months...

[FINate]

You left out a critical piece of information: how long do you expect to be invested?

Assuming you're relatively young AND you're not going to touch this money for a LONG time... you did learn your lesson, right?!... then don't mess around with trying to undo your mistake and just dump it all back in. What's done is done, you can't change it or fix it. If you think prices are out of wack/unrealistic (e.g. DCA and private equity route), well, isn't this the kind of thinking that got you into this situation to begin with?

[MudPuppy]

Punch yourself in the face, I’m too tired today.


I assume you are young and not looking at retiring in the immediate future, so put it back in the market and leave it the hell alone.

[secondcor521]

In your shoes I would develop an IPS, determine an AA, and rebalance to that AA tomorrow at market open, then never mess with it again.

I'd also skip the private equity thing.  Read the first few chapters of Tom Sawyer, where he gets a bunch of other kids to whitewash a fence by making it seem like a limited opportunity.  Same thing here.

[norajean]

The markets grind ever higher over time but occasional dips tend to be dramatic. Catching them is almost impossible. Hurry up and get back in.

[MustacheAndaHalf]

Title says it: I pulled out a sizable chunk of my index fund holdings a few months into the pandemic, after the market had recovered from the initial shock. I thought there would be a widespread economic collapse once people started defaulting on mortgages throughout the country. Obviously, that didn’t happen (or hasn’t yet), and the money I left in the funds has appreciated 73% since.
...

I’ve also been looking at a private equity opportunity which I think is probably less affected by the stimuli and other weird inputs that are affecting the prices of public investments.

Your investment thesis was mass mortgage defaults (ala 2008) followed by widespread economic collapse.  Were you aware foreclosures were halted by law?  All or nearly all states halted the process of foreclosures, making it impossible for your scenario to play out.  Did you collect information to prove or disprove your theory?  It sounds like you didn't.

If you develop a thesis, research why it's correct and have data, you might have an edge over the market.  If you guess, don't check any data... you've got a guess.  The market beats most active funds most of the time, so a guess will usually lose money.

Private equity takes private companies public.  Hundreds of companies have used SPACs (special purpose acquisition company) to go public both this year and in 2020.  Private equity might not have as many choices with the competition from SPACs.  Do you guess that private equity beats the market, or do you have data that shows it?

[RWD]

In your shoes I would develop an IPS, determine an AA, and rebalance to that AA tomorrow at market open, then never mess with it again.

+1

[TheAnonOne]

Can we get some numbers for our own curiosity? At least in percentage terms, I want to know how bad this one hurt you, just for fun.

I hate to say it but, if this one doesn't teach you that long term, index investing, is indeed a LONG TERM game and should NEVER BE SOLD. Then you won't learn.

I really hope you just dump it back in today, go have a drink, and invest twice as hard in 2021 to make up for it. That's really the only recovery you can hope for, because you are NEVER getting those lost gains back. You'll just have to accept that.

[Maturin]

Title says it: I pulled out a sizable chunk of my index fund holdings a few months into the pandemic, after the market had recovered from the initial shock. I thought there would be a widespread economic collapse once people started defaulting on mortgages throughout the country. Obviously, that didn’t happen (or hasn’t yet), and the money I left in the funds has appreciated 73% since.
...

I’ve also been looking at a private equity opportunity which I think is probably less affected by the stimuli and other weird inputs that are affecting the prices of public investments.

Your investment thesis was mass mortgage defaults (ala 2008) followed by widespread economic collapse.  Were you aware foreclosures were halted by law?  All or nearly all states halted the process of foreclosures, making it impossible for your scenario to play out.  Did you collect information to prove or disprove your theory?  It sounds like you didn't.

If you develop a thesis, research why it's correct and have data, you might have an edge over the market.  If you guess, don't check any data... you've got a guess.  The market beats most active funds most of the time, so a guess will usually lose money.

Private equity takes private companies public.  Hundreds of companies have used SPACs (special purpose acquisition company) to go public both this year and in 2020.  Private equity might not have as many choices with the competition from SPACs.  Do you guess that private equity beats the market, or do you have data that shows it?

Yes, I was actively paying attention to moratoria all around the U.S for exactly this reason. I thought (and still think) that the stop-gap moratoria would probably stave off, but not prevent an economic collapse. I could still be right about that, time will tell.

[Maturin]

Can we get some numbers for our own curiosity? At least in percentage terms, I want to know how bad this one hurt you, just for fun.

I hate to say it but, if this one doesn't teach you that long term, index investing, is indeed a LONG TERM game and should NEVER BE SOLD. Then you won't learn.

I really hope you just dump it back in today, go have a drink, and invest twice as hard in 2021 to make up for it. That's really the only recovery you can hope for, because you are NEVER getting those lost gains back. You'll just have to accept that.

I sold 35% of my holdings. So not the whole thing, but easily enough for it to hurt a lot that I missed out on a 73% return over the last 12 months.

In response to this and other comments, yes: I am fairly young and will work for at least another 15 years before I try to “retire,” by which I mean continue working but at a dramatically reduced number of hours per week. (Just the work I like).

[theolympians]

In your shoes I would develop an IPS, determine an AA, and rebalance to that AA tomorrow at market open, then never mess with it again.

+1

If you are on a longer investment timeline, get back in! If you  dither too long the next thing you know 6 months will have passed and you will still be thinking things might change to justify your original action.

As the above poster wrote get back in and don't look back.

[never give up]

It’s completely recoverable being fairly young and it’s important you forgive yourself and move on. Don’t try chasing returns to make up for it or try to fix your market timing problem with more market timing. As mentioned above select an asset allocation you feel comfortable with and either buy that in its entirety now or spread over 6 months or the rest of the year. With multiple decades of working ahead this is a blip that will be an irrelevance in the future. The key is ensuring you learn something from the experience.

[reeshau]

"The best time to plant a tree is twenty years ago. The second best time is now."

[ChickenStash]

Another vote for just reinvesting it according to your desired asset allocation. Make a mental note what happened here for the next time you get cold feet.

Don't beat yourself up about it, either. This is probably one of the hardest things to do with long term investing - leaving things alone. You only pulled a third out so you still have most of your investments working for you so it won't be a catastrophic problem. Just get back in the game and carry on.

[Maturin]

It’s completely recoverable being fairly young and it’s important you forgive yourself and move on. Don’t try chasing returns to make up for it or try to fix your market timing problem with more market timing. As mentioned above select an asset allocation you feel comfortable with and either buy that in its entirety now or spread over 6 months or the rest of the year. With multiple decades of working ahead this is a blip that will be an irrelevance in the future. The key is ensuring you learn something from the experience.

Appreciate this and all the other advice. Seems like the consensus is what I thought: go back in. So, I’m going back in. I had originally planned to do it over 12-18 months, but I’m going to shorten that to 6-12 months.

[Maturin]

"The best time to plant a tree is twenty years ago. The second best time is now."

Always loved this saying.

[ChpBstrd]

The fed just unleashed trillions of dollars in stimulus, the pandemic is on its way to extinction in the US, interest rates are rock-bottom, the unemployment rate is plummeting, the personal savings rate is high, the consumer debt burden is low, tariffs are likely to be relieved by the new administration, S&P first quarter earnings are increasing at a rate of 30% with 81% of companies beating analyst estimates, and this is the time to be nervous?

Dump it all into your AA today and swallow your sunk costs and fear of regret.

However, if you are still held back by the thought that we will soon experience a foreclosure crisis, you can easily hedge your stock allocation in either a direct or indirect way:

1) Direct: Buy put options to protect against a drop in the stock market. The S&P index has a very liquid and efficient marketplace, is cash-settled so no need to worry about early assignment, and with VIX regularly dipping under 17, this protection is on sale for relatively cheap. To hedge against a loss on the S&P500 larger than 20%, you could buy the 3325 strike put expiring in 2.65 years for about $264.45, which is 6.35% of the index’s current price. That’s a cost of 2.4% per year for guaranteed protection and reduced volatility. At that price, why not go all in? If that seems expensive, pay for it by selling a call and capping your upside.

2) Indirect: Hedge the risk of a mortgage crisis specifically or rising interest rates generally by buying the January 20, 2023 put options on AGNC at the $3 strike. You’ll pay about $8 per contract to receive $300 in the event of AGNC’s sudden bankruptcy. That’s 37.5x leverage on a specific scenario that would likely coincide with a major stock correction. So to hedge a loss of up to $100k in your index funds, you could spend $267 on these puts. YMMV because these instruments are not very liquid and you might have to pay ten cents to get executed.

Neither of these is risk-free, but the point is there are lots of hedging opportunities that can deliver upside potential without all the risks of stock investing. Beats sitting in cash another year, waiting to maybe be right someday.