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.
Market timing is a bad idea. Sometimes you get lucky.