Control Panel: Timing the markets?

Investment Analysis Clubs Macro Economic Trends and Risks
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Each METAR makes their own investment choices. @buynholdisdead clearly doesn’t believe in buying and holding. @intercst believes in stocks for the long run and holds a minimum amount of cash to cover a few years of expenses. @captainccs cleverly uses his stock portfolio to generate income from covered calls.

I am risk averse and dislike stock market volatility. I hold a ladder of bonds which I hold to maturity to avoid price fluctuations due to interest rate movements. I have held stocks in the past. I do time the market and don’t plan to buy stocks until the next recession brings their prices out of the bubble range and into a more historically reasonable range. I don’t see any point in adding risk when I easily live on my current income. However, interest income is fully taxable. @intercst has made a good case for capturing tax and other benefits (e.g. Obamacare subsidies) from stocks.

Is there a “correct” approach?

In the Stock Market, Don’t Buy and Sell. Just Hold.

There’s new evidence that market timing doesn’t work. Your odds of success are better if you just hang on and aim for average returns, our columnist says.
By Jeff Sommer. The New York Times, Nov. 24, 2023

…
A new study provides fresh evidence of why it makes sense to strive for an absolutely middling return. And the study implies that a simple, unspectacular strategy — buying and holding the entire market through low-cost index funds — is probably the best bet for most people…

The strategy that appeared to work best … beat a simple buy-and-hold approach in these markets by an annualized 5.5 percent, seemingly a remarkable achievement. And it managed to do this with a straightforward method — abandoning stocks and buying safe Treasury bills when the stock markets were overvalued…

Accept that you can’t beat the overall market and focus instead on minimizing your costs so you can get as much market return as possible. Broad, diversified, low-fee index funds — either traditional mutual funds or exchange-traded funds — will do this for you. But you need to be willing and able to withstand substantial losses, sometimes for extended periods, because while the stock market has risen over the long haul, it often declines… Other studies have demonstrated that successful stock-picking over long periods is also extremely rare…[end quote]

Here is the link to the study. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4586684

With money market funds paying close to 5%, cash has become a reasonable investment again. Institutions and investors together have a record $5.7 trillion parked in cash-like money-market funds. Will this money burn a hole in their pockets?

Investors are plowing cash into stocks and bond funds. Invesco’s QQQ exchange-traded fund, which tracks the tech-heavy Nasdaq-100 Index, reported its largest weekly inflow in history the week of Nov. 13. Funds that track high-yield bond indexes—the higher risk portion of the corporate bond market—reported their two highest weekly inflows on record in the middle of November. [end quote]

The Control Panel shows that the bull runs in both stocks and bonds are continuing. The trade is strongly risk-on as stocks and junk bonds are rising faster than Treasuries even though Treasuries are also rising. The Treasury yield curve is falling and is close to flat at longer durations. The Fear & Greed Index is in Greed.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 was 2.1 percent on November 22. This is slower than 3rd quarter but right where the Federal Reserve hopes to see.

The METAR is sunny. The year-end rally will continue next week.

Wendy

https://www.cnn.com/markets/fear-and-greed

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Yes, this is a common refrain and probably a good one for most folks. Tinkering at the edges may satisfy some who like to have a hand in things, but the set it and forget it approach does seem to work well. Of course, the “just hold” is dependent on what you hold and the best are the indices, more specifically the S&P.

For just one large illustration, if I had inherited $40 million from my father in the 1970s and invested it all in the S&P in 1980, I’d be sitting on about $5 billion now.

Pete

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Income from option trading is taxed as capital gains

Whatever works for you!

It works for traders who know what they are doing. It’s time consuming hard work. It does not work for the average investor.

The Captain

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Satire is not very well understood and is rarely appreciated. :smiley:

Andy

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That has been my philosophy - I haven’t sold a share of stock in decades.

JimA

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The American economy thrives on scam, skim and fraud. It’s possible to retire early just by not letting yourself get screwed. You don’t have to invent something, start a business, or do anything special. Merely watching your expenses (e.g. “free Obamacare”) and capturing the “skim-free”, compounded return on the overall stock market over an investing lifetime is enough to do it for you.

I got my Social Security statement a few days ago. It says my benefit at age 70 is $3,354/month, while the maximum Social Security check at age 70 for someone with 35 years of maximum FICA earnings is $4,555/month.

How does someone who hasn’t paid much of anything into Social Security over the past 29 years get 74% of the maximum benefit? It’s all about the bend points. Our 35-year, max-FICA worker gets very little in additional Social Security benefits in working the last half of his career. If he retired at about age 45 or 46, just before he reached the second bend point, he’d be getting 77% of the maximum benefit while only paying about half the FICA taxes.

Just another example of how the dumbest thing you can do in America, tax-wise, is to work for wage and salary income.

Why high income 40 year old retirees still get crazy big Social Security checks at age 62 (retireearlyhomepage.com)

intercst

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Unless it is held in a Roth IRA…

We convert our Trad IRAs to Roths within a tax bracket management scheme.
There are currently Treasury ladders in both. When a Bond matures in the traditional IRA, I convert the cash to the Roth and buy another rung.

I figure the interest in the traditional was always going to be taxed at income levels, so that helps with the rationale.

Of course, one needs a certain level of cash for the conversion taxes.

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I’ll repeat with emphasis, from many years on the MI board analyzing and discussing timing:

Timing does not SIGNIFICANTLY improve long term returns (CAGR) per se.

Timing - at least, done with intermediate tracking methods for asset allocation as it has been proposed, backtested and centered on in this small town - provides defense against major market drawdowns.

Yes, it means someone doing this has to follow and trust the signals about when it’s safe to get back in, as much as it’s time to get out to preserve capital.

As one accumulates more capital, and one’s future investing horizon shortens, playing defense against major market drawdowns becomes increasingly important (Like 2022, 2008, 2001-3, etc.).

FC

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I don’t know. About 75% of my net worth is unrealized capital gains. If I was making wild swings in my asset allocation between stocks and cash, I’d be paying hundreds of thousands of dollars in capital gains taxes. That’s a sure road to the poorhouse.

By keeping 5 to 10 years of living expenses in cash, I can ride out the downturn without selling. Stocks go up and down. But the money you lose to financial advisor fees, commissions, trading costs, and taxes is gone forever.

Minimizing the “skim” – the key to retiring early.

intercst

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Good for you. If in taxable accounts. Not in retirement accounts.

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I’ve heard many talk about this. What I have not heard discussed is how to replenish the cash pile after a downturn. Do you do that by selling in very good years more than you need to live on, and rebuild the emergency cushion that way?

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{{ I’ve heard many talk about this. What I have not heard discussed is how to replenish the cash pile after a downturn. Do you do that by selling in very good years more than you need to live on, and rebuild the emergency cushion that way }}

Yes.

Even the stock market crashes of 2000 and 2007 of 50% or more took less than 7 years from the previous peak to recoup the losses and establish a new market high.

A Short History of U.S. Stock Market Corrections & Bear Markets - A Wealth of Common Sense

intercst

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The traditional recommendation at TMF is to keep 5 years of expenses in a laddered maturity bond portfolio. Each year you live off the funds from the interest and the bond that matures. And in normal times you sell securities to buy another 5 yr bond.

When the market crashes you live off the bonds and defer replacement until recovery. This avoids forcing you to sell securities in a down market. The market usually recovers after a few years. So that five year bond portfolio should provide adequate protection most of the time.

And since your expenses are supposed to be 4% of your assets (or less), that implies 80% of your funds are in equities and 20% is in fixed income bonds.

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That’s the thing. If you simply buy and hold the index you don’t get average returns. You wind up among the top performing investors.

Imagine if you could be a 90% free throw shooter without ever practicing while the guy who practiced two hours a day was only 85%. (85% is a decent average for an NBA player).

Buying and holding a low cost index fund is an investing superpower.

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I totally agree with this. Market time is a quarter of the battle. Corporation timing is the bigger story that you are not discussing. Stock picking is difficult for most people. The concept of stock picking makes it a very shallow pursuit. It is not.

The reporter himself has never thought of timing when to buy a company’s shares. He is the NYT financial reporter and not much of an investor.

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That is not so hot for an interest-bearing vehicle because the principal was taxed first.

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Rebalancing to your desired asset allocation as you withdraw does this automatically. After a down stock year, bonds have grown as a percentage or your portfoilio. Rebalancing has you withdraw more from bonds. After a good stock year, stocks are overweighted and you withdraw more from stocks to rebalance your portfolio.

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The way I explain index fund investing, “Imagine if you could go to engineering school, never crack a book or attend a class, and still get a starting salary and lifetime income equal to or better than 95% of your classmates, would you take that bet?”

Nobel Laurate in Economics Daniel Kahneman had this to say about wealth managers and financial advisors.

"It’s surprising that a major industry appears to be built largely on an illusion of skill. "

Daniel Kahneman: Financial Advisers Aren’t Immune from the “Illusion of Skill” | CFA Institute Enterprising Investor

intercst

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That just tells me we print a lot. It also means right now it is not a great moment for that bet.

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No. It’s the illusion of skill or expertise in stock market advice. The well-dressed, impressively credentialed advisors that claim to be able to “beat the market” invariably underperform the index, whatever the market’s direction.

intercst

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