In rough terms, market timing is the practice of trying to make money by predicting future market performance. It is almost universally agreed to be a poor investment practice… “time in market is more important than timing the market.”
Predicting future market performance is… difficult. Even when your hypothesis is sound the market can remain irrational much longer than you can remain solvent. Not only do you need to be correct (often twice) but taxes and fees can erode any gains you do make.
But sometimes, when the stars align, it happens accidentally.
Accidental Market Timing
Over the past year or so I’ve done 3 things that benefited from accidental market timing.
Moving my HSA
The first is the simplest… I’ve wanted to move my HSA to a new administrator for many years (from UMB Bank to Fidelity.) In order to invest the HSA funds (in wonderfully low-fee Vanguard mutual funds) I was required to keep $1,000 in cash and to pay a $3/month fee. As far as fees go, this is fairly minor, but still… I could do better.
They never make it easy though. To transfer the funds I needed to sell all of the investments (no fees or taxes) and transfer the cash. This process would take “4 to 6 weeks.” I procrastinated this move for several years, until April 10th 2019.
On that day, VTI was at $147.70 when I sold. When the transfer completed on May 28th, VTI closed at $143.31… a decline (or a gain in my case) of 3%! Nice!
Alas, when I finally got around to reinitiating my position on Friday, June 7th I was only able to buy at $146.75 for a gain of 0.6%.
* I wanted to move the HSA prior to ever moving to California, as CA doesn’t recognize HSAs so this would have been a taxable event.
Rebalancing to Target Asset Allocation
When we quit working our portfolio was around 85% stock / 15% bonds. This shifted towards stock over the next 5 years as the market grew and when my private mortgage ballooned out, so in January of 2018, I sold some stock and bought municipal bonds putting our portfolio at roughly 90/10. (Despite doing the analysis, we’ve never been 100% stock.)
Then at the end of December 2018, when the market had dropped ~15%, I sold all of the bonds and put it back in the market. (Portfolio now at 97/3 stock/bonds.)
This is a clear example of intentional market timing, but sometimes you have to break the rules.
I sold VTI at $144.63 on January 30, 2018. I bought VTI at $126.32 on December 28th, 2018, for a total “gain” of 12.7%. Wow, amazing right!?
But that is only part of the story.
When I sold these shares of VTI I realized a gain of ~33%. On our 2018 tax return, we had a tax burden of $4,068 (offset by tax credits) that is 100% a result of this trade. If I didn’t realize this gain, I could have made a sizeable Roth conversion.
I also realized a loss on the bonds. I bought a municipal bond fund (VTEB) at $51.09 and sold it at $50.80, for a loss of 0.56%. This did reduce my realized gain saving 15% tax, so at least that is something.
During the 11 months between trades, I didn’t receive $2.6046/share in dividends on which I would have paid 15% tax for a post-tax value of $2.214. However, I did get an equivalent of $2.38/share in tax-exempt municipal bond interest, which by my math is more (7.5% more.)
I also paid commissions on all of the trades of $17.92.
In the end, total gain was a more modest ~8%. Half of this is in the form of municipal bonds (didn’t sell all of them), and the other half is in more shares of VTI. Additionally, we have higher basis in those shares (~$26k higher.)
As part of this transaction, I moved the cash to new Chase Sapphire Banking and You Invest accounts which yielded 60,000 Ultimate Rewards Points. I used this for an upcoming trip to Bali which saved me ~$1,000.
Massive Capital Gain Harvest
As preparation for a possible move to the US, I want to massively increase our basis in our taxable account. This will result in paying tax at 15% now, but will mean not paying tax at 17-23% later, plus easier avoidance of the ACA subsidy cliff (an $8,000 expense.)
In April of this year, I realized a long-term capital gain of ~$98,000 on a sale of VTI at $147.35. If I have to pay tax on all of it, I will have a tax bill of nearly $15,000. That’s a bummer, but if it saves going over the ACA subsidy cliff twice it has more than paid for itself. Plus, I’ll get a few free vacations out of it.
I remember thinking to myself at the time of this sale, “The President is doing that thing where he creates drama so he can later say he solved it even though nothing has changed (or been made worse…) with both China and Mexico.”
I remember also thinking that these funds could be used as house money (that was before I did the analysis.)
So what I did was park the money in municipal bonds (again.) Over the next month, stocks went down and bonds went up.
At one point I realized I could sell the bonds for a short-term gain, buy back exactly the number of shares of VTI that I sold, pay the $15k in taxes and still have $10k or so of extra cash, and I would have accomplished the original goal of increasing basis by $100k. Win, win, win!
I didn’t do that, and now the opportunity is gone (for now.) Market timing wins are ephemeral.
“I Am a Market Timing Genius!”
Ha, I wish. There is a very powerful danger with thinking that I (or anybody) can predict the market and successfully make money over the long term.
I provided 3 examples where I did (or could have) come out ahead. But what about the examples where I didn’t? Those have been lost to history and selective memory. But they happened, guaranteed.
Summary
Market timing is a bad idea. Sometimes you get lucky.
Do you buy mutual bonds via an ETF, or do you buy the actual bonds?
VTEB ETF
*municipal
Edit – MUB ETF also a good option.
I was due to rebalance just after the surprising vote for Brexit. I went ahead, buying more international than possible the day before because the markets responded very negatively to the surprise. Then once the markets settled, international recovered, I rebalanced again to sell the now higher priced international fund and buy US and bonds. A nice $10k bonus, thanks to nervous markets that HATE surprises.
Nicely played. We were headed to the UK shortly after the Brexit vote and enjoyed the 10% or so change in our favor in the GBP.
I also remember putting a bunch of cash into the market when it reopened after 9/11 after months of being “too busy with work.”
I started saving for retirement in January of 2008.
In hindsight, that was the most fortunate timing I could imagine.
The birth lottery?
Oh wow, that last one was a big win. Nice.
I haven’t had much luck with market timing, accidental or otherwise. It’s always been the wrong move when I sell. So now, I avoid selling as much as I can.
gotta pull the trigger for it to be a real win
Thank you GCC for this article. I’m planning to move from CA to Taiwan within the next year after I quit my current job. This and many other GCC articles will be my goto instructions when I move back to CA.
how long will you be in Taiwan?
couple of years at least. Wife’s still enjoying her job in Taiwan, and we’re planning to have a baby during that time as well.
Sad you went political.
(Edit: rest of comment removed.)
:sad face:
Same. It’s your blog, so you can do what you want— but if you’re interested in what your audience (or at least a part of it) has to say, please skip the politics when you can :)
If you can’t consider the political environment when making short term investment decisions… so, I can’t.
Agreed, market timing is for the fool. However, I am flirting (and modelling) with the idea of adjusting global equity exposure according to US, DEV, EM Schiller-PE ratios for each group. My model calls for CAPE-dependent eq exposure from 20% to 90% at any given time, re-balancing quarterly or every 6 months, with the split dictated by current region weight plus/minus the CAPE-dependent adjustment. My 15-year back testing of this model (I know, not the same as future testing) yields higher returns compared to most indices (S&P500 included), with much less volatility. Several sources confirm the relationship between CAPE ratio and future LT (more than 10 years) returns. And the back testing result is encouraging. Am I 100% sure this will work? No, because market timing is for the fool… But someone once said: Stay foolish. :)
how does the model look after taxes and fees?
Valid question :). I pay zero fees on my online brokerage. The spread cost is negligible. If I was to rebalance 2-4 times a year, I would select LT-only shares to sell, while attentive to keep my capital gains inside the 0% bracket (most of my income is from investment). So the answer: the same in my case.
Hmmm, you got me thinking. Perhaps I could try to simulate a 15% CG tax every year, which I haven’t done. I suspect that would bring the results down a bit, but not enough the invalidade the main objective: good performance (or out-performance) with less volatility/risk. As you probably know, staying 100% invested in the S&P500 for a life time time is nearly impossible for most stomachs.
> I suspect that would bring the results down a bit, but not enough the invalidate the main objective
That’s what all the hedge fund guys say ;)
Overall this sounds like an international value play?
Haha. Not remotely compared to hedge funds strategies, which place wild bets daily. Yes, global investing, always!
I also got somewhat lucky with market timing over the past month or so. Rolled over my 401k and HSA and got about 5-6% bonus because of the market decline.
Congrats!
Great post again. Might use the pay tax with credit card trick for points this year. Can I pay just some with credit card and the rest with debit?
Yes
Nice article. I am curious as to how one would differentiate market timing with portfolio management? If you rebalance your portfolio based on risk versus reward using various chart techniques (I.e. 200 DMA), using a disciplined sell strategy, using dollar cost averaging, tax harvesting, etc. is it still market timing or is portfolio management?
Were you trying to time the market? It does not appear so and that is likely why you didn’t sell your bonds. However, for those that follow charting and oversold and overbought indicators it wouldn’t have surprised you that the market would bounce back after May’s movements.
I always remind myself that trading and investing are two different behaviors. I invest with the long term in mind and with the expectation I don’t have to micromanage my investment. When I trade, I am prepared to micro manage the trade to maximize my success and recognize I am in reality placing a bet that I may win or lose. As I get older and closer to retirement I am less interested in placing bets.
What was the SCOTUS ruling… “I know it when I see it”
thoughts on the sapphire account and ‘you invest’, currently have a 401k on John Hancock (.78 fund mgt fee! ugh), and an IRA rolled over from a 401k in vanguard. just applied for ally to plop my savings in their HYSA, and am a proponent of bank account bonuses, and since i have a chase account (chk and sav) which i’ve been meaning to close i’m missing out on their somewhat frequent and decent bonuses was looking for some place to go. the 60k offer looks enticing for sure (sitting on about 700k UR between myself and p2), thoughts on the you invest platform compared to fidelity/vanguard/schwab which seem to be the more highly recommended
I like that I got a few free trades and 60k UR points. Other than that it is basically the same as the others.
I primarily use my Fidelity account (with ATM reimbursement) and also have a Schwab account (also with ATM reimbursement.) This is why.
Best timing win: 2013 death in family yields IRA from estate. My wife, executor, is slow to disperse funds – worried about market timing, cost averaging, etc. Early 2014, I convince her to quit draggin’ her feet and go all in – and she finally deposits a $102k check in Vanguard. ‘Bout a week later, market promptly corrects nearly 10%. We cringe.
Next day, I receive notification from estate bank that deposit was cancelled due to insufficient funds! She forgot to xfer estate $ from savings to checking account before dispersing! We re-deposit funds while at the local bottom, and promptly pick-up 10% on the quick recovery. Happiest $35 NSF fee I’ve ever paid…
Wow, this is an amazing story.
I have never successfully (or unsuccessfully) timed the market. But I did hit the birth lottery you and Adam (who is random) referenced above. Our day will come.
My only successful market timing has been depositing my backdoor Roth contribution and investing it on January 2nd this year.
I thank my lucky stars everyday that I read jlcollins posts on market timing. Investing is a breeze if you don’t care about the highs and lows and just keep calm and invest.
Thanks for sharing, great article. I had the same thought re: Trump’s trade war and managed to rebalance our stock/bonds allocation. Can’t say anything more than it being luck, but we love that it has worked out so far!
Not sure what you mean about CA not recognizing HSA’s..?? I live in CA and have one through Fidelity (yay!).
You don’t get a deduction on CA State taxes, and any dividends or realized gains are taxed at the state level.
Not necessarily market timing but bad luck. I sold a couple cars at the end of last summer and immediately wanted to put the nice cushion of cash to work and dropped it into the market on Oct. 2, 2018. Then subsequently watched it lose 20% in the coming months and still haven’t made it back to even. Not a good time to push a decent amount of cash into the market…
Bought BRK.B at $39 and BTC at $275. Kept them both and added to BRK.B. Turned BTC into a free trade when it exploded and recouped the principal and put that in BRK.B The free trade has virtually no risk since all you own is unrealized profit. Worst that can happen is you loose the gain and not pay the unrealized taxes . BTC is unlikely to go to zero or even $ as the volatility is about +- 40%. Not sure if that constitutes market timing or market risk timing. I also bought GE at $70 but sold that years ago after 1999 hit. Think it fell in half before I sold it. It’s an odds game like counting cards in Vegas, it is not investing.
i got the opposite timing, moved 545K out of old 401K into a IRA in april and missed all the gains just in time to hit the may drop. now only have about 530K (which is better than it was 2 weeks ago)
bill
If my experience is common, you’ll forget about this in due course. I know these things happened I just don’t remember any details.
How do places like the Motley Fool stay in business? Because people actually believe they can “beat the market”? I have a few friends that have enough money (don’t have families yet; in their mid 30’s) where most of their portfolio wealth is put in VTI and index funds, but they also enjoy playing around with a few stocks they think will be big winners, just for fun.
They only put in about $10k-$20k or so and pull home large enough salaries as engineers so they’re def well diversified, however last year a good friend of mine realized a $300k gain on Netflix (long term) since he bought in early enough and did his research that gave him the confidence to believe they would go big! (even though inevitably, this was only a guess…) Am I crazy to think I can hedge my bets too, even if it’s mostly just for fun and 95% of my portfolio is in VTI?
For the same reason Vegas and Macau stay in business.
We’ve also all heard the story of the guy who put his life savings on black. Everyone loves a winner, and you only need to win once.
We don’t hear the story of the guy who did the same who is now living in the garbage can out back of the Golden Nugget.
The bigger question is can Mr. Roulette do it again? And again. And again. And again.
Probably not. The same goes for stock picking. With a small percentage of a portfolio, it is no more harmful than any other vice.
I always keep 10- 30% of my portfolio in cash for big market drops of 10- 20% to deploy some capital in cheap stock, index fund or an etf. When you have big gains in one stock, index fund or etf, like at market highs is a great time to sell off some and eventually get to 10 or 20% in cash or bonds,
So when the market does drop 20% (you know it will eventually) you will have the cash to take advantage of it. Always have a plan to take advantage of opportunities. Having said this it is not for everyone, you have to have a plan and control your emotions.
Since the best time to buy the market is when it is hardest to do it because everyone will be saying the market is going down
even more. (December 24, 2018 as an example)
And the best time to sell is when the market is hitting new highs, everyone else is buying more and says its going to the moon.
Keeping cash around for the 20% drop only helps if the market didn’t go up 20% while you were on the sidelines.
Interesting article. Not sure if you are setting up to invest in recessions, but this article might just help out a lot. The author is an interesting character and kinda thinks more like a Doug Casey than the average investor. Mind you, I like the idea of getting extraordinary results here because I think if everyone follows the same path, we all get the same results. Anyway check it out. It is an interesting read:
(link removed)
Love the blog BTW
I’m perfectly happy matching the performance of the total stock market, aka the same results as everyone else