I’m putting this in GD since there may not be a factual answer and I expect there to be a lively debate on the topic.
The stocks that one would own during a bull market are different than the defensive stocks they would own during a bear market. With most economists* agreeing we are due for a recession in the next 2 years (though they disagree on exactly when in the next two years), when should someone move their portfolio from a bull outlook to a bear one with a recession looming?
*I’m not considering the doomsday predictors like those who said the dollar would collapse on January 14, 2020.
You’re asking how to time the market. Good luck with that.
My own practice is to rebalance on an annual basis to bring our portfolio back to a predetermined ratio of equities and bonds. If the market is up, I sell some equities and use the proceeds to buy bonds. If the market is down, I sell some bonds and use the proceeds to buy equities. No market timing required, just a calendar.
A very few freakball geniuses have accurately predicted the arrival of one recession or another. See The Big Short for an example. You may be one of those lucky folks, but if you were, I suspect you wouldn’t be asking for investing advice on a social media site.
Making a portfolio recession resistant is only timing the market if you expect the recession to come at a particular time. If you are willing to forgo gains to reduce the eventual losses, then you aren’t. No more so than if you rebalance, which of course if the first step.
I definitely have given up some gains by doing this. But I’m comfortable where I am when the recession eventually hits.
Since I’m retired, I’ve moved money from more volatile equities to more stable dividend producing equity funds. This also helps with cash flow, which is the important thing for me.
However, back in 2008 I did nothing and kept buying during the recession, and it worked out very well. I was lucky enough to have kept my job - having funds easily available in case you lose yours would be step number one.
In that case one should always be at the asset allocation proportions they can live with if a recession hits. Because until it does hit you won’t know. Now my projected retirement date is ~20 years from now and will include a pension so we are ~99% stocks. As we approach retirement we will change the allocation percentage as a function of age regardless of market numbers. Unless the economy is an AI economy with Star Trek credits and all that.
We won’t lose anything in a recession in the next 10 years because we won’t be selling anything in the next 10 years besides rebalancing. So during a recession we’d be buying more shares.
This is exactly what the OP is asking: how to time his portfolio shift relative to an anticipated recession. That’s the very definition of timing the market.
One approach is to buy financially strong non-cyclical companies which may do OK even when the general market is falling. (There are ETFs that will do this for you if you don’t want to pick individual stocks.) This approach is good for anxiety-prone people like me: I’m loaded up with this kind of stock and hardly follow the market! I hope experts improve on this advice, but one way to find this kind of stock is to screen for low “beta.” Here are some giants with low beta. (This is NOT a recommendation.)
PG 0.36
KO 0.39
WMT 0.40
MCD 0.41
PEP 0.52
T 0.58
MRK 0.63
PFE 0.63
JNJ 0.71
Again I’d like to hear from experts, but I’m not sure this is a good time to be buying corporate bond funds.
Timing a market requires making two perfect decisions. You have to know when to get out, and you have to know when to get back in. If you get either of them wrong you end up losing money.
Your best financial move is to ride it out, just like it always is. Timing the market can’t be done. Experts consistently fail to do it, that’s why market indices outperform managed funds on a regular basis. John Bogle’s advice will do you best here.
If the current market losses have you concerned it’s a signal that your asset allocation is incorrect. You shouldn’t have any money you need in the next ten years invested in the stock market, it’s as simple as that. Calculate what your asset allocation should be, and it’s not as simple as 100 minus your age in bonds, but that will do for a start, and just stand there.
Even then, you may be in retirement for ten, twenty or more years. I don’t think you would want to be entirely out of equities from the time of retirement on, though you may want to start to change your asset allocation.
I consider timing the market as trying to sell at the top and buy at the bottom - which almost never works.
On the other hand, we know that there will be a recession sometime in the future, and deciding to act now to be ready when it comes is not timing the market. Unless, that is, you think reality has changed and the market will steadily rise.
Timing the market is an attempt to minimize the loss of gains by selling too soon or buying too late. If you accept these, that isn’t timing the market.
Riding it out is good, if one is far from retirement, but it also involves having enough liquid assets to support oneself in case of the loss of a job. Selling stuff now (better, last week ) at a high market can do that in case the money isn’t there yet. Sure, if you don’t get laid off you forgo some gains in the long run, but it is insurance.
Oh, I see. You don’t want to time the market. You just want to know what time to sell your stocks while their price is high (before the recession) so that you can buy them back at a time when their price is low (during the recession).
Yes, that involves having enough liquid assets to support oneself for a period of unemployment. That’s kind of investing 101, an emergency fund with six months worth of spending. I’m in retirement, so have three buckets, a cash bucket with two years worth of spending, a bond bucket with seven years worth of spending, and an equities bucket with everything else.
I’m a little bemused by the spectacle of people panicking over a little 10% haircut. Did they think it was never going to happen? It has always happened before, the gravy train always come to a halt, but if you plan it so you don’t have to sell equities into a downturn it’s always best to stay the course.
Like I said, if this little hiccup makes you worry, you shouldn’t be in your current asset allocation. I just looked, and as of yesterday VTSAX, the Vanguard total stock market index closed at 77.08. That’s as low as it’s been since the middle of November. Oh my God, I’ve given back an entire three and a half months worth of gains, somebody talk me off the ledge.
I agree with all the post and the others telling OP that if you can time the market (yes positioning anticipation of a recession is timing the market) successfully and you don’t trade for a living, you’re in the wrong line of work. Not that being able to do it consistently is a prerequisite for a reasonably successful career as a professional trader, since most can’t do it either. But anyone who can really do it consistently is wasting their time doing anything else for a living.
I’d just say that asset allocation especially in a time of virtually zero real expected return on safe investments (USD, worse if your base currency is EUR or some others) is a trade off in misery. For most people to avoid unbearable (for them) anxiety when the stock market is going down a lot, that causes bailouts at or near bottom, they have to suffer some discomfort from all the people on the internet crowing about their returns with 100% (or more) stock portfolios when stocks are doing well. That’s my goal, somewhat symmetrical disgust with my portfolio at times like now or when stocks are doing great.
If you’re locking in a specific allocation of your financial assets over the long term so as to reduce long-term risk, that’s not market timing. If you believe:
[ul][li]a recession is coming soon[/li][li]you’re changes to your portfolio now to brace against it[/li][li]you intend to reverse those changes once you believe the recession to be over[/ul][/li]
Then you’re attempting to time the market.
“Selling stuff…at a high market.” In other words, you want to time your sale to coincide with peak asset prices. How is that not market timing?
I just keep repeating my mantra; “I need enough money, I don’t need all the money.” It helps. Yeah, I only made 8.6% over the last three years in my three bucket portfolio whereas a 100% stock would have made almost twice as much, but I planned for 4% returns, so I can’t really complain.
What I have to keep telling myself now is “Don’t try to catch a falling knife.” I just did my annual rebalancing at the first of the year, but the VTSAX I use for my equities allocation is around eight dollars a share cheaper than it was a week ago, and I love a bargain.
