One of the things I’m fascinated about is why some people get upset with what other people do with their money.
Every time I write in my newsletter that I’ve decided to increase or decrease risk with my investments, someone gets hot and bothered!
What someone does with their money has no bearing on what happens with your money. You have the freedom to make one giant paper money statue and light it on fire if you wish.
I choose to consciously have a purpose for all of my investments. Otherwise, there’s no point to saving and investing so much all these years. I feel sorry for folks who’ve already reached financial independence and still can’t stop hoarding money.
Let me go through some examples of market timing everybody makes, but somehow don’t get recognized. I’m certain by the time you finish reading this article you’ll find more purpose with your money.
10 Examples Of Market Timing
1) Front loading your 401(k) and other pre-tax retirement accounts. If you are lucky to receive a bonus or have enough cash flow during the beginning of the year, it’s commonplace to max out your 401(k), IRA, HSA, Solo 401(k), Roth IRA, or whichever tax-advantageous retirement account you have.
People like to get these accounts out of the way, just like how people like to pay themselves first with each paycheck. How and how much you get paid results in market timing.
2) Deciding when to use your 529 plan. You may spend 18 years contributing to a 529 plan for tax-deferred compounding until your kid decides to go to college. Whether you use the funds at age 18, 19, 20, 21, or 22, that’s up to you. You might even decide to sell some stock to pay for private grade school since that’s a new rule.
But what if your child decides to defer college or take six years to graduate? What if your child decides never to go to college? Ah, market timing.
3) Deciding to take distributions from your 401(k). You can take penalty-free distributions from your 401(k) after age 59.5. Once you start withdrawing, you can stop and start again innumerable times until age 70.5. Once you’re 70.5, you must withdraw a specific portion, the Required Minimum Distribution, from your nest egg each year.
Because you are in great health and don’t need your 401(k) funds given your large after-tax portfolio, you decide to wait until you’re forced to take RMDs at 70.5. Your good genetics and financial preparation results in market timing.
4) Deciding to de-risk your House Fund. If you’re planning on buying a house within the next 6-12 months, you should probably keep your House Fund in 100% cash or short-term Treasuries. You don’t know exactly when the perfect house will come along. Even if you find the perfect house, you might not win the house because your offer isn’t competitive enough.
Let’s say you get a surprise promotion at work. This promotion gives you the confidence to finally buy a primary residence. As a result, you decide to de-risk your House Fund into 3-month Treasuries and aggressively start looking for a dream home. Your promotion made you time the market.
Related: How To Invest Your Downpayment Depending On Your Time Frame
5) Deciding to invest 100% of your severance check in the stock market. Getting a severance check is a nice windfall, especially if you had planned to quit your job anyway with nothing. But who knows exactly when you will be able to successfully negotiate a severance?
Management might suddenly offer up severance packages one year due to a restructuring. Or you might get sick and tired of your boss another year and want to leave. Whenever you do negotiate a severance and invest it all in the market, that’s market timing.
6) Deciding to sell your rental property because your tenants moved out. You might have had a great 12-year run as a landlord, but couldn’t find replacement tenants at the same rent. With the desire to simplify life, you put your house on the market and discover its worth 70% more than you bought it for. Therefore, you decide to take advantage.
If your tenants hadn’t moved out, you wouldn’t have been able to remove them even if you had wanted to due to strong tenant rights laws in your city. Your tenant’s decision to move out due to a new job opportunity is market timing.
Related: Why I Sold My Rental Home: Had To Live For Today
7) Deciding to reinvest your house sale proceeds in a diversified real estate portfolio. After riding one concentrated position up 70% with leverage, you decide it’s best to diversify your real estate holdings by investing outside of your expensive coastal city.
As a result, you invest in several commercial real estate properties in Austin, Texas where cap rates are 5X higher. Not only are you earning a higher return, but you’re also earning it passively.
Related: Focus On Long-Term Trends: Why I’m Investing In The Heartland Of America
8) Deciding to buy a new primary residence five years later. Your commercial real estate investments in Texas pay out five years later with a 12% IRR.
Since the initial investment, you and your partner had a baby and decide it’d be nice to move out of your tight two bedroom apartment to a three bedroom house with a backyard. You didn’t plan to have a baby, but here he is! You use the proceeds from the Texas properties to buy a nice house.
The unwinding of your commercial real estate portfolio and the arrival of your baby is market timing.
9) Deciding to stop work to take care of your baby. After going back to work after three months of parental leave, you feel terrible dropping off your baby at a daycare center. As a result, you decide to stop work until your boy goes to preschool at 3.5 years old.
Your partner still works a stable job, but due to the loss of your income, you decide to sell some stocks to pay for general living expenses. Your guilt about leaving your baby in the hands of strangers results in market timing.
Related: Career Or Family? You Only Need To Sacrifice For 5 Years At Most
10) Deciding to cash out of your IPO proceeds. Your partner’s company successfully IPOs after she worked there for six years. Her stock options are worth $1.5 million and she also wants to stay home and raise her boy as well.
Once the lockup period is over, she decides to sell 80% of her stock and diversify her net worth into index funds, REITs, municipal bonds, and short-term Treasuries. At one point, her net worth was comprised of 90% company stock.
The CEO’s decision to sell a piece of his company to public retail investors results in market timing for you.
Related: Career Advice For Startup Employees: Sleep With One Eye Open
Market Timing Is Life
Don’t be naive. Every decision you make is market timing. Life is an unpredictable journey.
At the very least, everyone should save and invest as much as they can when they can. Have financial fire power to withstand anything life throws at you.
Every dollar you save should have a purpose. Don’t just think the main purpose for all your saving and investing is to live a comfortable retirement. That’s too amorphous a goal.
Have specific purposes for your investments, such as buying a house, paying for your kid’s tuition, remodeling your home, taking care of your parents and so forth.
In addition to making sure your money has a purpose, practice taking profits for a better life. If you do, ironically, you’ll still likely end up with more than you’ll ever need because you’ll have been so focused on accumulating and optimizing your investments.
Don’t let what other people do with their money affect how you feel and do with your money. You must focus on your own financial mission.
We are not gods. We do not know the future, nor will we live forever. The person who dies with too much loses.
My financial path is completely different from yours. So are my needs and desires. I will continue to make financial decisions that best fit my family’s needs. So should you.
Related:
Various Portfolio Compositions To Consider In Work And Retirement
A Different Dollar Cost Averaging Strategy
Readers, why do people get upset at what other people do with their finances? Why do we blame people for market timing, when our entire lives are unpredictable? Now, if we’re talking about day trading, that’s not something I recommend.
Love this post and you actually uncovered some “market timing” scenarios that I never even considered till now but it rings true.
“We are not gods. We do not know the future, nor will we live forever. The person who dies with too much loses.”
That is such a profound quote. Too often we worry about “enough” but in the end we are more likely to end up with too much (speaking in general of the people with FIRE mindset) which means we probably worked too much and had less chance to enjoy life.
Dollar cost averaging is another form of market timing because you are trying to hedge your bets but still an element of timing the market.
I, too, like the quote of “The person who dies with too much loses.” Yet, those with a FI mindset, it’s almost guaranteed it will be too much. For me, it could be considered too much, but I’m looking to change my family tree forever, and to *honor* and *carry on* my father’s hard work to raise our family out of poverty. He came from poverty, and I was raised just a hair above poverty. While I won’t be giving money away to family for no work, there will forever be money in the family for small matching funds to get started with a new business or for college.
I like that idea of a matching fund! Thanks
excellent!
Yeah, great points that regardless of what you call it, we are all timing the market in some capacity.
The difference is specifically deciding which moment is going to be when the market is going to skyrocket or tank. To me, that is what day traders do and I am not going to try to invest that way. I figure the exact time is less important than trying to get as much into the market as soon as possible.
A great synopsis of the many times in life we inadvertantly (or unknowingly) time the market. Many of these deal with life events including retirement, home buying, regular contributions to retirement accounts, setting money aside in a 529, etc. Your list is quite complete and provides a great guide on some of the moments when we time the market.
Luckily, dollar cost averaging has been shown to work better than attempting to time the market. This makes the passive contributions into low-cost index investing a wonderful choice for acquiring wealth for when we finally enjoy financial independence.
I’m currently in the situation of de-risking our house fund. I’ve already taken 25% out of my equity portion of the portfolio with intentions of switching the rest to short-term treasuries over the next 3 months. After being down almost 30% in December, we’ve now gotten to a place of seeing a small gain. Big swings can cause a lot of uncertainty in money we know will be needed in the near future.
We guarded against our emotions and selling in a panic and have been rewarded as a result. I don’t plan to test my luck again a second time. Call me a market timer.
‘Luckily, dollar cost averaging has been shown to work better than attempting to time the market…’
what is your source for this statement?
ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/
DCA beats most market timing strategies because you’ve got more invested in the market, and the market mostly moves up, so the cost of staying out is high.
For the same reason, if you search “DCA versus lump sum” backtesting shows that if you’ve got a chunk of change to invest, you’re mostly better off just getting it done with today rather than averaging in for the same reason.
Wow, -30% in December alone is way too much volatility if you are looking to buy a house. Glad you are de-risking. What a blessing for stocks to recover in a straight line so far.
I should clarify: I was down closer to 15-20% in December the month of December.
From July through market bottom, I was down 30% on this portion of our house down payment fund.
I rather try to understand what other people do, place myself in their shoes. Maybe I’m doing something wrong. I see what other people do as an opportunity for me to improve my personal finances if I am not doing what they are doing and if it fits my life’s goals. I just don’t like it when people panic and sell. :-)
This is great information.
Where are you right now with your investments — in percents?
I’ve done what I said I would do in my newsletter if the S&P 500 reached 2,800 again, and I feel great. I truly do. Like a third chance. Hope you’re doing what’s best for you.
Love this post Sam! Makes a lot of sense. I lol when I read the bit about lighting a money statue on fire. It’s so true that some people get so fired up about what other people do with their money.
I too notice on various forums that some people are so obsessed with optimization and criticizing others’ money moves if it doesn’t match their world views. You buy a house because you find a perfect home for your needs, not always because it is an optimal money move. Even if one optimizes to death, mistakes can still happen because no one can really predict where the market is going. One just has to acknowledge that every investment decision has a gambling component and anyone can be wrong.
Guess I shouldn’t feel guilty about the significant lifestyle inflation my hubby and I have experienced since my early retirement at age 55 in 2013 due to health issues (and a very generous contributory pension plan payout provided by my employer starting at age 55). Hubby also retired in 2005 about a month before turning 50 due to health issues. While I was still working, I suppose the 40(+) grind cube farm wage slave time suck served as a restraint on our spending. Now with time available, and the unpredictability of our future health, we want to do take advantage of our physical and mental capabilities while we can.
We do have specific purposes for our various tax deferred retirement accounts:
1. My “medium” 401k is earmarked for long term care. This account was previously invested 100% in a very low fixed rate savings type investment, thus missing out on more than a DECADE’s worth of bull run stock market growth (*sigh*). It is now conservatively invested 60% fixed (since we are both in our 60s after all), 40% equity (Vanguard’s total stock market index fund for at least a modicum of growth).
2. My “smallish” Fidelity rollover IRA is our emergency fund, invested in short term CD step stool (thank you for that post!), with at least $10k kept as cash for “instant” availability.
3. My “generous” Vanguard rollover IRA funds our typical living expenses. This account is primarily invested in two balanced funds that together have an asset allocation of 50% fixed, 50% equity.
In addition, we have a “small” after tax Vanguard brokerage account, invested in a balanced fund with an asset allocation of 60% equity, 40% fixed. This is our “fun” account, since it was an inheritance from my parents.
Our (after assumed tax) overall net worth including the above investment accounts; saving and checking accounts; primary residence, rental property, and their associated mortgage balances has an asset allocation (as of 1/31/19) of 4% cash, 42% fixed, 13% equity, and 41% real estate. (I don’t invest in REITS since we already have 41% due to our primary and rental properties.) We try to keep our liquid portfolio asset allocation around 20% equity, 80% fixed in order to pass the “can hubby sleep well at night” test. ;)
Thank you for this post. It helped me see that yes, I do indeed have a purpose for ALL of our accounts.
Sounds like you guys are where you want to be and have specific plans for your money. Hope your recovers and stays strong. I’m assuming you don’t regret leaving work when you did.
I have yet to meet anybody after the age of 40 who regretted retiring.
Retirement is AWESOME!
We certainly have no regrets about retiring in our 50’s. Sure, it would have been nice to retire earlier than 55, but that was the earliest I could do so under the rules of my very generous pension plan. Investing the majority of my five year period certain pension payments in rollover IRAs really juiced the savings needed fund our lavish retiree lifestyle today. Of course the ongoing bull run hasn’t hurt things either. ;)
Living the “pleasantly plump” FIRE dream. :)
I consider market timing to be when you make decisions on when to get in, or out of, investments based on your expectations of how the stock market will perform (or the economy in general).
The examples you give are life decisions or not your decisions at all that yes, have the effect of putting money in or taking money out of investments at different times, but based on events not tied to market or economic expectations.
While technically I get your point and you’re not wrong, I think you are trying to be a bit cute with what most people consider to be market timing when they say don’t try to time the market.
Brian, I had the same takeaway from this article as well.
Sam, My guess is, the push back your getting from market timing is when you pick a specific number on the S&P to lighten up on stocks and go more towards bonds. However, what the people who are giving you grief are missing is that you are comfortable with a lower return because you already hit your “number”.
So yes, your technically timing the market, but only because you’ve achieved your desired result. Kinda a potato patato sort of thing.
Thanks, Bill
What is my number though? I have multiple investment accounts for multiple purposes.
In past articles you’ve said you like to achieve 2x the risk free rate per year. 5 to 6% per year would be your number I assume
Sounds like a great rate of return with not too much worry, no matter where you are in your financial journey actually. The key is to never lose money. Then you simply cannot lose.
“5 to 6% per year would be your number I assume”
That is REALLY way too conservative when you can average 10.1% by investing and holding a broad market index. You do realize the impact of a 5% investment compared to a 10% investment over 30 years right?
It is a tremendous underperformance that will significantly impact your portfolio. But if you are comfortable with these returns for your situation, great. I prefer to maximize my investment portfolio.
Again, it depends on where you are in your financial journey and how satisfied you are with your life and your finances. Are you still working? If so, you can afford to take more risk. Many of us no longer want to work for a living anymore, again, that depends on where you are in your financial journey and how satisfied you are with your life and your finances. Are you still working? If so, you can afford to take more risk. Many of us no longer want to work anymore.
What’s your stage?
“Are you still working? If so, you can afford to take more risk. Many of us no longer want to work anymore.”
I am still working. And that is insignificant as retirement is actually a long-term life event, usually longer than 30 years (or about a 1/3 of your life). Therefore taking risk in retirement is warranted and logical as long as you have some reserve money set aside to draw from in a down market. And this retirement duration is probably longer than 30 years for readers of your articles so it makes no sense to reduce risk after retirement as you have written about for early retirees.
Sounds good. Let me know if your thoughts change once you retire.
Usually “market timing” refers to making investment allocation decisions based on trying to predict the future. For example, moving from stocks to bonds if you think the market is going to crash, etc. I think that’s a fair principle for most people to abide by — most of us (even professionals) are terrible at predicting “the market”. But investing money when you have some available (or on a regular schedule as in a 401), or using it for life reasons is not that.
We all have different financial paths which is why it’s crazy to think why would others get upset at what they invest with their money. It’s not their money so why even care? Maybe, for example, if they see a friend buy a car but can’t afford it because they are in debt that would be one thing to lookout for their financial well-being. But to get upset in the investments decisions they do like open a 529 or put money into a savings account rather than invest in the stock market, it’s not worth the energy to get frustrated at their decisions. They are doing decisions that is comfortable for them. You can provide all the advice you want but at the end of the day, it’s their money to where they want to put in and not yours….which you should be mainly concerned of.
I think you’re right. Every decision is timing. We’re selling our rentals to get some money out. Being a landlord just isn’t great right now. I’m getting older and we don’t want to deal with tenants. Oregon is enacting the first statewide rent control. A bunch of condos is coming on the market this year. Better get out before we’re stuck.
Why people get so riled up? I don’t know. I guess people believe they’re right and they don’t want you to contradict them.
Isn’t timing everything – in investments and in life?
I think people have a strong need to receive validation. And we generally react negatively or angry if there is a contradictory view to what we believe in strongly. If I believe strongly that US stocks will run up over the next year and then you come out saying that you sold off your US equity positions, that is a direct assault on my judgment and intelligence. I believe that is why people then become hot and bothered by your investment decisions.
The financial self-validation is looking at your own net worth and asking whether you’re happy with where you are at your age or not. If you’re not, do something about it. If you are, then awesome.
I sold about $50,000 in stock in 2015 to pay for a new deck, hot tub, sliding doors, and landscaping. The S&P 500 is up 35% since. I missed out on $17,500 in gains and I couldn’t care less. The value I get from my remodel more than makes up for the missed gains.
Market timing is life. And I choose to use my investment profits to pay for a better life.
Being born now is market timing.
Both in the specific and even in the fact that there are markets from which we can reasonably expect returns.
Much of it is inevitable and I agree with the post and commenters’ sentiment that worrying about it too much or over-optimizing is losing life.
My question, though, is why does it bother you when people have opinions about how you invest?
This topic is just interesting to write about. I feel bad for people who get upset at what I do or what other people do with their money. I’m trying to help them feel OK with their money and love themselves.
Is the same thing with people who are easily triggered by other peoples’ opinions. There’s a hurt inside them that can’t be helped with some empathy and explanation.
Gotta luv how the industry has socially engineered the population into being price insensitive.
Even if it is market timing then what’s the problem? One still has a 50% of being right.
Making good life decisions with money is indeed a financial Samurai thing. Don’t stress the haters Sam.
It seems that sometimes people care more about “being right” rather than making money. If you make a money decision that disagrees with someone else’s investment philosophy and they get upset, it’s because they care more about being right than making money. I guess they must be interpreting your actions as saying “you are wrong” and consequently their ego takes a hit.
I used to be like that too, and I know firsthand that this kind of stubbornness negatively affects your financial returns. On the other hand, if you’re the type to not care what other people do and don’t worry about “being right”, you probably won’t let your ego get in the way of your returns.
The easy solution is to accept being WRONG.
I know I can’t properly time the market for maximum returns. But I know I can utilize my money to the best of my abilities to pay for a better life. That’s the whole point of having money, not to always be optimizing for greater and greater returns.
Timing is everything. If I had started school a year later or earlier,I would have never met my wife of 15 years. That means my two kids would not be alive. If I had not quit that job at that time I would not have gotten that other great job. Etc. Your entire life today could have been very different should you have missed a job interview or missed a date or not done this or that 15 or 20 years ago. Investments are just like that. When people criticize your asset allocation or argue that your VTSAX % should be 73% and not 72%, just ignore them. Fours years into FIRE, I really don’t spend any time defending my actions and positions with dummies, haters, and trolls. Zero upside. Life is too short. Keep up the great job, love your blog.
Hi Sam
thanks for this post
My philosophy is pretty simple:
Reach FI (Work Hard) to Enjoy life (Play Hard)
You are right when you said everyone has different objectives with their money.
And every single dollar has that purpose and financial accounts designed for that scope.
In my opinion until you don’t reach FI (thus you are a paycheck to paycheck slave) you cannot waste not even a cent in something not strictly necessary, even thought it might give you pleasure (too many things give us pleasure…even thought it is just an excuse to waste money)
I liked this: “We are not gods. We do not know the future, nor will we live forever. The person who dies with too much loses.” I certainly enjoy saving and investing like everyone else, but you also have to get yourself to spend some along the way on things you enjoy or make your life easier. Its about having the right discipline and balance which sometimes can be hard to do.
Here’s a thought. As noted above, I don’t agree with the statement he who dies with too much loses. I’ve come to enjoy the chase more than the end result while enjoying some along the way. I can be happy knowing my family and other causes will continue to enjoy the fruits of my and Mr. market’s labor.
Hoarding wealth is definitely normal. I just feel it’s better to use our wealth while living and help other people instead of after we die.
Thinking more about this, I realize there is a lot of room for what one individual considers “sufficient”. Hoarding has connotations of excessive ness, but a reasonable cash cushion or rainy day fund seems prudent. Also I agree on helping others when you are around is laudable too.