“Time in the market” not “timing the market” is a maxim you can and should strive to live by. Invest regularly (better yet, automate your investments). Hold. Retire early. That should be your aim.
So should you just ignore when the news starts reporting on bull (high stock prices) or bear (low stock prices) markets? Usually, the answer is yes . . . but there are a few exceptions well known in the FI community.
When you shouldn’t time the markets
The obvious answer is never to try to time the market . . . true of course, if you are the ultra responsible investor who never sits on the sidelines and has regimented (or automated) investment habits.
If you have no bad debt and already invest everything beyond you safety net (~3 months expenses), maxing tax advantaged accounts first (401Ks, HSAs, IRAs) and taxable brokerage last, then there will not be any timing opportunities for you.
Does this describe you?
If you are this responsible and this regular, congratulations! You are ahead of 95% of Americans. Since you don’t sit on uninvested cash, you won’t have funds to “time” nor will you have the temptation.
What about everybody else?
If you are like most people, the truth is probably somewhere in the middle. You do most things right with your money, but the truth is, you don’t invest as much or as regularly as you can.
Outside of auto 401K contributions, you are not sure how to or if you should invest more.
You probably also have lump sum amounts that enter your account at certain times: a tax return, home sale profit, company bonus, or perhaps a signing bonus for switching jobs.
You probably also have larger expenses to consider from time to time: should you buy a new car now, trade up to a newer home, or replace an aging deck this year, for example?
With occasional spikes in your expenses and earned cash, you have to decide when or whether to spend that money or invest it. Basing your decision on the market is not ill-advised, it’s just smart.
Use your wits, and watch your retirement assets accelerate. Avoid making a decision, and calamity won’t befall you, true. But . . . you might miss out on some easy money. Read on to figure out how.
So does this mean I can time the market?
Not in the traditional sense of market timing. Never buy Gamestop stock because a TV personality said its price is at “buy level,” for example. You can’t and shouldn’t try to time the specific buy point of any specific asset.
But in a broader sense, you can make decisions on whether to invest or not based on the market. In fact, you should. The payoff could be huge, and its no risk to you as long as you plan to buy and hold the investment for a long time.
Below, I’ll briefly cover what to do if you have extra cash (or one time expenses to consider) in either a bull or a bear market.
What to do in a Bull Market
During a bull market, stocks are red hot high so a return on investment here could take many years, where as paying down a debt has an immediate impact in eliminating interest payments to the bank.
Now is not the best time to sacrifice that deck or paying down debt so that you instead fork all of your expendable cash in an investment at historic high prices.
You should still continue to max your pre-tax 401K, HSA, and IRAs(if tax deductible) and receive company match as usual. But investing beyond this should be your last choice if you have other necessary expenses or debts to consider.
If you have nothing else to do with the cash, then by all means, invest it during a bull market. Certainly there is nothing wrong with continuing to invest since our strategy for early retirement is to buy, hold, grow, and withdraw at a later date.
What do in a Bear Market
Its a one word answer: Buy! If you have too much cash parked or you can wait another year or two on trading for a newer car, now is the time invest in stocks. They are on sale at a price you will never see again your lifetime!
Aside from eliminating toxic credit card debt (20% or more), there is no better “time” to buy stocks than the Black Friday like sales that exist during a Bear Market. If you have the cash, you’ll thank me. This has the potential to shave away years of work.
You could even make sound purchasing decisions in a bear market to put less down payment on a car or a house or postpone a major purchasing decision (that new in ground pool you have have been dreaming of, for example).
Now a few caveats. This is only accessible:
- to investors with debt and/or with too much uninvested cash parked in the bank
- only directionally (there is no perfect timing)
- only during bear markets, when the market is at a significant valley
This flies in the face of two conventional schools of thought: (1) Eliminate all debt before you invest outside 401K and (2) never try to time the market. In a vacuum, I argue against neither viewpoint and mostly followed both the entire 15 years I took to reach FI.
Popular finance guru Dave ramsey is a proponent of pure debt elimination. That advice certainly applies to the Americans living paycheck to paycheck, but this doesn’t describe you.
And I can’t dispute this study showing that market timing is, a best, a waste of time long term, and at worst, a potential recipe to lose money.
So where does Mr. FI get the gumption to weigh in?
Simple. If you have the funds and stability (ie. rainy day money, two earner household, low living expenses, etc.), you can’t afford not to invest.
I’ll even provide a brief case study below to prove my point.
Note: My family personally has whittled our savings down to to less than 4 months of living expenses to buy more VTSAX stocks during the current 2022 bear market. I’ll provide an update on how that investment worked out for us in a future post.
The Why
Its simple math a grade schooler can do. House debt (3-6% interest) and auto debt (5-10% interest) is far lower than the average 12 month rebound of bear markets at 43%.
While no one can predict a true market bottom and invest all of their excess cash to earn the full 43% return, you can expect the market to be somewhere between that high figure and 10% (the total stock market average return over the past century is 10%, a well known figures amongst investment buffs).
That’s right, even if your timing was absolute crap and you bought at the tail end of the bear market, you’d still expect to earn something north of 10% long term.
Chances are if you are an aggressive investor willing to hold your assets until your (hopefully early) retirement, you should perform much better. Even if you only enjoyed half the 43% opportunity, your return would be around 25% (half way between 10-40%) in the first 12 months following the bear market.
How does math work?
Let’s run some numbers. Let’s suppose you own a pickup truck like Mr. FI’s brother (who apparently doesn’t love to haul anything with all that horsepower, but does love paying interest to the bank).
You bought it brand new for $60K on a 7 year loan at 10% interest (I’m estimating way high here to be fair to those who focus on debt first). After 2 years of payments ($996/mo), you would still owe $47K. But lucky you, you followed the Secret Life of FI’s budget advice and you saved $47K in other expenses. Congrats! Too bad you left it in the bank as you saved it over these last 2 years.
For the past 6 months you’ve been hearing that 2022 is a Bear Market year. What should you do with the $47K? Should you
- leave it in the bank, ya know, just in case
- payoff your sweet pimpin’ fortress of chrome or
- invest it
Let’s see what happens in 5 years in each scenario.
- Leave it in the bank. Obviously, the worst. At annual inflation of ~3% your (and 3X that in 2022), $47K is worth considerably less. You lost money!
- Pay debt off. You listened to Dave Ramsey and paid off your truck loan. You eliminated 5 years of paying interest to the bank on your truck, saving $12,800 you would have otherwise spent over that time. Sweet! Too bad you missed out on investing during the bear market. Now lets say in years 2-5, you were able to invest what you saved on interest ($12800) in the stock market at a 10% annual return. That $12800 in interest you avoiding paying is now worth about $17,000. Parked another 10 years, its worth around $50K. Nothing to sneeze at.
- Invest. You listened to Mr. FI. You invested the $47K, knowing the market is down, without knowing or caring exactly how deep in the toilet the market is. Your plan was to hold long term. Let assume your timing was right in the middle and you got a 25% ROI in year 1, and then the normal 10% average of the stock market years 2-5. Over 5 years of compounding interest and dividend returns, your $47K would have grown to $86K. If we deduct the $12,800 in interest we had to pay on the truck loan, the total net gain is about $73K, which is nearly 50% higher than our return in paying the truck off early. And if you kept that $83K 5 year investment parked in the market, in another 10 years, that initial bear market “timed” $47K would be worth a whopping $223K!
Conclusions
No one one when markets will hit bottom or how long a recession or bear market will last. If you have money to invest during a bear market, you might do better or you might do worse.
The bottom line is this though: if you have the money, the smart move is to invest and hold.Your investment could net 6 figures in wealth growth in 15 years like highlighted in the truck payoff scenario.
At worst, you’ll break even with the market at a 10% average return over time, which is still likely higher than the interest you carry on your house or your car.
So can you “time” the market? In a traditional sense, the answer remains no. You can’t get rich off timing when to buy and sell Tesla stock or bitcoin. No one can win that game long term or regularly. Don’t even try it.However, there are times when it makes sense to supercharge debt elimination or investments. If you have no toxic debt, and your are in the wealth accumulation phase of life, where you have more income coming in than expenses, the bear market is a great time to buy.
Stocks are on sale! Its exact return cannot be precise, but what is certain: it undoubtedly is the best investment you can make during these market conditions. FIers know this secret to investment timing and so now do you.
What about you? In the past, did you hold, pay debt, or invest during a market downturn? Did you run the numbers in hindsight to estimate the impact of your decision? Or did you payoff debt for the peace of mind? What did you learn? I’d love to hear your comments down below.