> Many investors focus on the right time to buy stocks because they don’t want to buy near a peak in case of a future market crash. I understand the feeling. With the market near all time highs in early 2017, it can be tempting to hold off until there is a larger negative adjustment in prices.
> The only problem with this approach is the market could go up for a significant period of time before a correction happens.
> For example, if you search “stock market overvalued 2012” on Google you can find plenty of stories discussing how overvalued stocks were in 2012. If you had started waiting for an S&P 500 correction then, you would have missed out on the ~70+% increase in prices from 2012 through early 2017.
And what has the S&P 500 done since 2017? Continuing:
> If I still haven’t convinced you, let me tell you a story. The story is about a man with possibly the worst luck in investing history.[0][1] He made a total of 4 large stock purchases between 1973 and 2007. He bought in 1973 before a 48% decline in stocks, bought in 1987 before a 34% decline, bought in 2000 before the dot com crash, and bought in 2007 before the Great Recession.
> Despite these 4 individual purchases that totaled a little less than $200,000, how did he do? He ended up with a $980,000 profit for a 9% annualized return. What was his secret? He never sold.
> That’s right. Selling out is literally selling out your future wealth. You need to hold on to your assets as you acquire more.
> This is the purpose of capitalism (i.e. acquiring capital). The only time you should sell your investments is for rebalancing (annually/quarterly, etc.) or in retirement. Otherwise, you already know the mantra.
And as Maggiulli shows, trying to buy the dip, even when you know when the dip will occur (which is impossible), gives worse results than simply putting away a little bit every month:
Put away a little every pay cheque, in a diversified low-fee fund (S&P 500, Total Market/Russell 3000), at a comfortable risk profile that allows you to sleep at night (0/20/40% bonds), and try not to pay attention too much about what The Market™ is doing. Most of us are investing for retirement, and if you do the above, you'll probably end up with a decent nest egg.
Save a little for the future, and enjoy the present.
This line of reasoning assumes the future looks like the past. Which is generally a solid mode of thinking.
But, if the future looks like the past, shouldn't it give you pause that on many metrics markets are substantially more richly valued than at any peak in the last 100 years?
You can't have it both ways. Either the past is useful or it's not. If it's useful, then you have two conflicting data points -- market timing doesn't work, and we're at the top of a big bubble. If the past isn't useful, then neither data point is valid.
Now, you'll probably argue that even if it is a big bubble, the past suggests it always comes back. Setting aside the obvious fact that it's mathematically better to buy after the bubble bursts than before, you're in the same conundrum. Does the past matter or not? If it does, then yes you should expect to recoup the money eventually from buying at the top (though, if you bought at the top in 1929, you had to wait until the 1950s to get back to even). If the past doesn't matter and this time is different, then you can't say anything productive about the future.
> If it's useful, then you have two conflicting data points -- market timing doesn't work, and we're at the top of a big bubble.
Market timing does not work over the long-term, and even if we are at the top of the bubble, you can't know we're at the top, but more importantly: it doesn't matter.
> If it does, then yes you should expect to recoup the money eventually from buying at the top (though, if you bought at the top in 1929, you had to wait until the 1950s to get back to even).
And what would your returns if you kept doing DCA every paycheque from the 1929 top, on the ride all the way done, and then little by little through the 1930s, 1940s, and 1950s?
Turns out, not horrifically:
> I wanted to show how market conditions can affect the end results of an investor who periodically invests in the stock market over time. Leaving aside taxes, costs, inflation, etc., I ran the numbers by decade going back to the 1930s to see how much money an investor would have ended up with by investing $10,000 each year on a monthly basis (or $833/month) in the S&P 500.
Especially if you have some bonds to rebalance with:
> For instance, investors earned a real 2% average annual return on their equity investments during the 1930s, according to Ibbotson Associates, a market research firm. But they pocketed a real 7.1% on their government bonds and 2.7% on short-term Treasury bills. Yet during the 1950s investors earned a real average annual return of 16.8% on stocks, while losing 2.2% on bonds and 0.3% on bills.
Asset allocation and portfolio management is about managing risk for the returns that are desired and/or needed. If I can achieve my (retirement) goals with only 4% returns, then why would I take on extra risk to get 6%?
If I have 60% equities and 40% bonds to achieve my 4% returns, and equities go crazy, such that I've earned a pile of money in that portion of the portfolio such that they now make up (e.g.) 70%, then selling some off to rebalance is not about market timing, but rather about managing risk and not having too many financial eggs in a particular basket.
It had doubled by February 1986: you should have been taking money off the table as it went up. Take your profits and put it in other places: bonds, international. Further, as the valuations/CAPE went up, you should be expecting future returns to go down.
By the time the Nikkei hit a CAPE of 50, that means expected returns would be 2%: is there any place where one could have put one's money that earned >2%? When the Nikkei hit a CAPE of 94, that means expected returns were ~1%. Japan 10-year bond were making 5% at the same time:
A bunch of money invested in Japan, in 1990, with a 30% JP equity allocation, a 40% JP bond allocation, and a 30% international equity allocation, would have funded a thirty year retirement using the 4% rule just fine:
Why would anyone be investing 100% anywhere? Regardless of it being the Japan, US (S&P 500, NASDAQ, Russell 3000, etc), or any other other area/country?
Harry Markowitz, who won the Economics Nobel for portfolio theory, said that diversification is the only free lunch in finance.
First, talk to me when the CAPE of any market has a CAPE of 100 like the Nikkei had:
> What if an investor decided to detach from the herd once the CAPE ratio hit 50? At that point, the Nikkei had already delivered 263% over the previous ten years, or 13.8% a year. Not too bad. But once the CAPE ratio broke 50 in 1986, it wouldn’t peak for another 45 months, and it would add another 145%. Could the person who sold at CAPE 50 really sit on their hands for another 4 years as the mania sucked everyone else in?
So at 35.83, as I type this, the expected returns are 2.79%. If you can find an investment that earns at least that (or more), then you should be putting your money there. Can you list an investment that has that expected return? Indian, Bahrainian, or Mexican bonds perhaps?
The actual lessons to learn from Japan, one of which is diversification:
> Diversification, as always, is the key to avoiding a blow-up. The entire point of diversification is to avoid having your entire portfolio in a Japan situation. The global stock market has done just fine since 1990 even when you include Japan in the results.
Yeah, people seem to ignore this part of the argument and just focus on US equities. There was a time not long ago - but long enough that most 20/30-somethings on this site don't study - that Japan was the obvious future steward of the technology age which even led to spikes in Asian-American hate crimes and lax policies of those events (Vincent Chin comes to mind), culminating in the clearly-better Japanese auto industry and their breakthrough JIT manufacturing methods.
A few years later, their economy crashed (along with ours), but ours recovered through various means, mainly immense untapped natural resources, net inflow of immigrants (skilled and otherwise), the Internet, and well, Andy Grove, if we want to give credit to at least one individual here.
Japan is now a funny country across the ocean we marvel for their cultural weirdness and spotless streets. It wasn't like that just 40 years ago, and the idea that the United States can't go down that road for some reason is... well, naively optimistic.
The probability of the bubble bursting now though is higher than in 2017 (can't argue with that?) ... Rebalancing is a form of market timing, why not be 100% in equities and never rebalance? There is some evidence to suggest that's a good idea.
The way I approach this is that I take these sorts of macro bets with some portion of my portfolio. In a sense I adjust or rebalance my portfolio to partly reflect what I believe are better investments at that time, but not radically so. That way I get to have the fun of maybe timing the market and making an extra buck while also mostly being continuously invested. Being diversified also helps.
A post by Nick Maggiulli in 2017:
> Many investors focus on the right time to buy stocks because they don’t want to buy near a peak in case of a future market crash. I understand the feeling. With the market near all time highs in early 2017, it can be tempting to hold off until there is a larger negative adjustment in prices.
> The only problem with this approach is the market could go up for a significant period of time before a correction happens.
> For example, if you search “stock market overvalued 2012” on Google you can find plenty of stories discussing how overvalued stocks were in 2012. If you had started waiting for an S&P 500 correction then, you would have missed out on the ~70+% increase in prices from 2012 through early 2017.
* https://ofdollarsanddata.com/just-keep-buying/
And what has the S&P 500 done since 2017? Continuing:
> If I still haven’t convinced you, let me tell you a story. The story is about a man with possibly the worst luck in investing history.[0][1] He made a total of 4 large stock purchases between 1973 and 2007. He bought in 1973 before a 48% decline in stocks, bought in 1987 before a 34% decline, bought in 2000 before the dot com crash, and bought in 2007 before the Great Recession.
> Despite these 4 individual purchases that totaled a little less than $200,000, how did he do? He ended up with a $980,000 profit for a 9% annualized return. What was his secret? He never sold.
> That’s right. Selling out is literally selling out your future wealth. You need to hold on to your assets as you acquire more.
> This is the purpose of capitalism (i.e. acquiring capital). The only time you should sell your investments is for rebalancing (annually/quarterly, etc.) or in retirement. Otherwise, you already know the mantra.
* [0] https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-w...
* [1] https://awealthofcommonsense.com/2014/02/worlds-worst-market...
And as Maggiulli shows, trying to buy the dip, even when you know when the dip will occur (which is impossible), gives worse results than simply putting away a little bit every month:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Put away a little every pay cheque, in a diversified low-fee fund (S&P 500, Total Market/Russell 3000), at a comfortable risk profile that allows you to sleep at night (0/20/40% bonds), and try not to pay attention too much about what The Market™ is doing. Most of us are investing for retirement, and if you do the above, you'll probably end up with a decent nest egg.
Save a little for the future, and enjoy the present.