Disclaimer: You can’t time the market. Invest for the long term in a diversified portfolio. Enjoy the wonders of compound interest. Blah, blah, blah…
Back in 2019 my IRA was invested in a basket of diverse ETFs recommended by my advisor at a large investment firm where my IRA was held. For several years, I had been dissatisfied with performance, but lacked the experience or time to do a lot of research. I basically just left it in the equities they recommended when I rolled it over in 2011.
Finally, in October of 2019, I had a hunch something was going to go sideways, and I pulled all my IRA funds out of the stock market, and put in in a money market account. The Dow was at 27850. When the market crashed in March 2020, it plummeted to 20000. Had I jumped back in at that point and ridden it back up to 36000, I would have a nice windfall. But of course, I didn’t because I thought the pandemic would hold the market down for much longer. I missed the bottom.
So now, I’m watching the market sink and gaging when would be the right time to jump back in. I’m not a stock trader, I’m just looking for some index funds that will track the growth of the market.
So what do you say? Have we hit bottom, or are we still on the way down?
You say “disclaimer”, but you apparently have not taken the lesson on board if you’re still asking about market timing, especially from random people on the internet. You sold at almost the perfect time, just before the COVID crash - but still lost out because you didn’t get back in the market. It’s often easy to see that the market looks vulnerable, but it’s much more difficult picking the moment when it will rally viciously. And after it starts rallying - as you have discovered - it can be psychologically very difficult to buy when you have missed the bottom.
You really should just buy whatever you need to buy right away (based on a sensible percentage allocation to stocks) and then just forget about watching the market every day. But if you want a psychologically palatable way to do it, I have found that a good plan is to buy two-thirds of what I need to buy right away, and then buy the remaining one-third later based on some plan - either at some set time in the future, or at some market level that I have planned out ahead of time, perhaps either down 10% or up 10% whichever comes first. Do two-thirds right away, not just half. You will still feel okay about it if the market trades lower, because you know you have some more to buy. But the important thing is that if the market trades up from here, it’s psychologically easier to be buying just one-third more at a higher level. If you only buy half and the market trades straight up, you may fall into the same trap as before and never buy the other half.
In any event, the important thing is that you have some clear plan get back in the market, and stick to it. The value of your pension in 20-30 years depends principally on getting in the market and staying in the market, not on timing your entry point to perfection.
So despite admitting that you can’t time the market, you tried to time the market and failed.
And now you’re asking for advice on how to time the market again, despite having acknowledged (and demonstrated) that you can’t time the market.
There’s an investment expression: "“Bulls make money, bears make money, pigs get slaughtered.” In your zeal to absolutely maximize ROI, it’s very likely that you’ll do worse than someone who simply stayed in the market.
Now that you’re out of it, how to get back in? On average, the market at any given moment is higher than it was at any given previous moment, and this will likely be true going forward. To maximize your expected ROI then, logically you should put all of your money back out there right now, regardless of market status quo. This if course ignores the risk that the market might not be at absolute bottom yet: there’s a range of possible outcomes for long-term ROI, many of which are undesirable. That’s risk, and is something to be managed. You can’t do this by trying to time the market yet again. Instead, you can do this with plain old dollar cost averaging:
Reinvest your nest egg in the market over some meaningful period of time - maybe the next six to nine months - and do so without regard to what the market is doing (IOW: don’t try to time the market again). You probably won’t maximize your ROI this way, but you probably won’t get slaughtered either, and the latter is of great value.
If you’d followed my advice yesterday, you’d be up 1.7% already. That’s an annualized return of 47,000%. It turns out, unlike you, I’m a market timing genius!
I made the same mistake, and for the same reasons. I can empathize!
My thoughts about investing have been influenced, consciously and subconsciously, by the long shadow of 1929 – the stories of those who lost everything, and of those who got out just in time. Sometimes trying to time the market feels like a very rational and prudent move! (I mean, just look at was happening to the economy in the spring of 2020!)
Now I remind myself that “the market can stay irrational longer than you can stay solvent.”
I keep telling myself “I’m in this for the long con.” and “The number on the stock ticker doesn’t matter until I’m going to sell. Hopefully, that won’t be for a decade or so.”
That hasn’t kept me from spending the last couple of decades watching my AAPL stock soar, then stall, and dive, then recover… and rinse and repeat…
(When I check it, I’m picturing pulling up a flower that I planted, just to check how the roots are doing.)
But notice I’m only watching one stock, as a diversion. And not my whole portfolio. That’s taking all my resolve, and is about all that’s keeping me from panicking.
So jump back in at some point, and don’t panic. Even if you aren’t “buying the dip” but “buying the slide”…
Anecdote time! I saw my stock guy on the street and he gave a thumbs up and said “I’m picking up some great long-term stocks for you, at garage sale prices.”
My wife and I aren’t into individual stocks - all of our investments are in mutual funds. I update our spreadsheet with current prices once a month, and once a year I buy/sell bond funds as needed to get us back to our target bond % allocation. We’re in at least a dozen different funds, and over the years we’ve only ever sold a couple of them that had fallen and then not recovered after several years.
To the extent that the stock market moves up or down on any given day, it’s entertainment to me. Your second sentence is right: your share prices don’t truly matter until it’s time to sell.
An event like the Great Depression is analogous to a commercial plane crash: it’s so catastrophic that there’s not much you can do to defend against it if it happens, and so rare that it’s not worth going to the trouble to try, except maybe by saving/investing considerably more for retirement than calculations suggest you’ll need, so that a major stock market implosion on your retirement day will still leave you with enough assets to scrape by.
Recessions, however, are a regular thing and are worth planning for. Keep a percentage of your assets in bonds, once a year buy or sell as needed to maintain that target percentage, and adjust that target percentage upward as you approach retirement.
Is any one a little bit grateful to have an opportunity to test their resolve? I’ve been through five recessions during the build up to my retirement, and frankly, in the accumulation phase, they’re dead simple. Just keep buying. I retired in 2016 and the Covid recession in 2020 was my first distribution phase recession, and it was barely a hiccup, just a couple of months, but this one looks like it may hang around for a few years. So far I’ve been successful in following my plan, which is to stay fully invested at my allocation targets, and I’m patting myself on the back a little but for it.
I have a first world problem in that my wife and I have a variety of income streams coming in, and we only need a few thousand or less per month from the investments, but still, I remain sanguine, and I wasn’t sure I would.
Also, the people who really got screwed in the '29 Crash were those who borrowed money to invest in the market. When everything fell, creditors demanded their money back, putting the borrowers/investors in a deep hole.
