Getting Nitty about concept of "Market Timing"

['Chair]

Warning: Investment Noob Alert

With the recent "correction" (or whatever you want to call it), there has been a lot of buzz in the personal finance blog world with regards to investment strategies...

Two things in particular that I would like to discuss are...
a. Upping regular (weekly, biweekly, monthly) Contributions to Investment funds
b. Re-allocating funds (ie. taking money of the table and putting it in stable value options)


A. Upping (weekly, biweekly, monthly) Contributions to Investment funds

How is this not timing? Basically, the idea is for upping the percentage contribution to accounts (401k/whatever) to which you contribute regularly while markets are down/falling and decrease contribution when markets are up/raising. Some argue that its not market timing, but "increasing the effectiveness of dollar-cost-averaging" stating that they are in the market for the long term.



B. Re-allocating funds (ie. taking money of the table and putting it in stable value options)

When would this ever be a good idea? If you feel the need to "re-allocate to stable value funds" because of a downturn in the markets, would this not indicate that you did not properly assess your risk tolerance? One of the blogs I read, mentioned that they pulled money out of their 401k to wait for the market to bottom out before pushing back in. I no longer read their blog.

[lambdb]

I had pulled out prior to the big correction(mostly due to luck), and am still on the sidelines waiting for some stability. Although yesterday had some sick gains to be made.

I dont really know why you would disagree with either of these approaches and personally you can use both.

Taking money out prior to a correction saves you dough, it doesnt mean you didn't assess your risk tolerance correctly, just the fact that you did some due diligence and don't feel your current investments are not going to temporarily return. Also in this unstable market some of the medium risk ventures are essentially high risk now until stability returns.

['Chair]

[ QUOTE ]
I had pulled out prior to the big correction(mostly due to luck), and am still on the sidelines waiting for some stability. Although yesterday had some sick gains to be made.

I dont really know why you would disagree with either of these approaches and personally you can use both.

Taking money out prior to a correction saves you dough, it doesnt mean you didn't assess your risk tolerance correctly, just the fact that you did some due diligence and don't feel your current investments are not going to temporarily return. Also in this unstable market some of the medium risk ventures are essentially high risk now until stability returns.

[/ QUOTE ]

but I still don't understand how this is not "timing".

please correct me if I'm wrong, but you are essentially saying that if you do your due diligence, you will see that the market is about to correct and adjust your investments.

[DesertCat]

what "big correction"? The s&p 500 is at an all time high if you ignore the last four months. It's up for the year, and up over the last four months. The peak to trough of the correction was less than ten percent. No one knows what the market will do next week, next month or next year, you should ignore any who claims they can. If you are dollar cost averaging just keep plowing on and ignore the market safe in the knowledge you beneflt during each pullback.

[emon87]

Both of them are forms of market timing.

[NajdorfDefense]

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Both of them are forms of market timing.

[/ QUOTE ]

A is timing.

B sounds like asset allocation, not timing.

[emon87]

[ QUOTE ]
[ QUOTE ]
Both of them are forms of market timing.

[/ QUOTE ]

A is timing.

B sounds like asset allocation, not timing.

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In B you are reallocating based on your expectation of whether the market is going to go up or down... sounds ike timing.

[superadvisor]

The market is based on time, making a decision based on the "timing of the market" sounds like the only logical way to invest.

[IdealFugacity]

[ QUOTE ]
The market is based on time, making a decision based on the "timing of the market" sounds like the only logical way to invest.

[/ QUOTE ]

This is completely wrong but I am not sure that this isn't because of semantics.

Regular, pre-planned investment strategy is best for nearly everybody, and absolutely everybody who wants to follow a passive indexing strategy. it's not passive if you think about your decisions on the basis of what the markets are doing / did last week / did in the last 6 months. Pick a plan, and re-analyze when you have a major lifestyle change (or have aged several years with a boring, stable life).

"I will invest up to the match of my employer in my 401k, $4000 into my Roth IRA in 12 equal monthly installments, and any additional amount into either my 401k or a taxable account required to keep my total stock/cash allocation at 70%/30%, without fail. Those investments will be in an overall allocation of X% large cap, Y% small cap, and Z% international large-cap index funds" print, sign, and put away till something happens to you. that's passive investing in a nutshell.

[gull]

Those are both good examples of market timing.


Rebalancing, by the way, isn't market timing. It's simply keeping your risk exposure and expected return constant by not allowing your allocation to drift.