They say timing is everything, and it certainly is true for stand-up comedians. Whether it’s true for investors is a hotly disputed subject. The staid old mutual fund companies are very sniffy about market timing, which is the attempt by the likes of you and me to buy stocks or bonds when they’re all cheap and unload them before they all drop in price – in other words to guess when the cycle will turn just before it does.
The Vanguard Group, the vast Pennsylvania money managers who pioneered index stock funds for retail investors, repeat the mantra “stay the course” every chance they get. They must have people like me in mind.
Friends were swapping stories of the profits they were pocketing, so, not to be outdone I plunked all my savings into an index fund in the summer of 1987.
I won’t pretend I’ve always been that unlucky. After the 1987 debacle, I regained confidence and edged back into the market and had a nice, wealth-enhancing ride through much of the 1990s. But when the market became enamoured of stocks with no earnings and ignorant day traders were having their heyday, I couldn’t get over how wrong they had to be.
After all, this was not just my opinion. Alan Greenspan, the then chairman of the Federal Reserve with certified guru status, was calling it irrational exuberance.
So I hopped out of the market years before the correction occurred after the Nasdaq with its over-hyped tech stocks peaked in March of 2000. Sure, I was proved right eventually, but my timing stank. Nobody could have called the exact right time to take his winnings off the table, but I didn’t even come close.
More recently, I followed the herd out of dollars into pounds and euros just before the dollar staged a recovery. At least I held my nerve and waited for the dollar to sink again. It was a longish wait, but I’m ahead now.
Does this litany of missteps mean the best advice is to forget about trying to time your purchases and sales of financial assets? Hardly. If you need to make a big move with a chunk of cash – an inheritance, a bonus, or a pension lump-sum distribution, say – you don’t want to do it blindly. For example, now would be a crazy time to throw all your savings into stocks. The risk of a significant pullback in stock prices, probably triggered by worsening economic performance in the United States, seems higher now than it has been for several years.
Emerging market indices are at all-time highs, too, and while that’s not a surefire sign that the direction from here is down, it should give investors pause. Timing isn’t everything in investing, and getting it wrong can be costly, but it’s also impossible to avoid making bets on where you expect markets to go.
It’s a more subtle question what to do if your money is already invested in some of those assets that seem vulnerable. The trick is to adjust your portfolio so that whatever the outcome in terms of stock prices, bond prices and housing prices, you won’t feel too regretful. That may just mean lightening up a bit on stocks and adding to cash. Don’t let capital gains tax deter you from making some sales, unless you face a very high marginal rate.
Remember, better to pay the taxman something than to see a sharp drop in portfolio value eat much more of your wealth.
If you know you’ll need to get your hands on some of your money soon, this seems like a good time to turn assets into cash. If you live in what you suspect is an over-priced house, you’re probably stuck, unless your powers of persuasion are very strong. My conversations with my wife about downsizing to realise the gains on our house before the local boom goes sour never seem to go anywhere. She says I can move if I’m worried about the economy, but she’s staying put. When it comes to individual stocks you really do have to decide whether the company in which you’ve invested is so strong for the long-term that a buy-and-hold strategy makes sense in all economic conditions.
I invest in small biotechnology stocks, and have learned that their prices often overshoot in both directions, so timing my buys and sells is a big part of profiting. A few days ago, my shares in Biomarin went up much more than I expected when the Food and Drug Administration approved one of their drugs – an approval decision that surprised nobody.
I like what Biomarin is doing – their pipeline has some promising candidates and they know how to develop drugs and obtain approval – so I had not planned to sell my holding, but this looked like overshoot to me and I have taken my profits – up 40 per cent since I bought in less than three months ago. The stock price has already dropped back a little. I’m hoping to buy shares back at a more advantageous price, probably from people who listen to a fast-talking television personality who featured the stock this week.
When they find this is not the next Google, they’ll get bored and sell to me for less than they paid. At least, that’s the theory – sometimes my assumptions don’t work out so well and I could always get left behind. No, timing isn’t everything in investing, and getting it wrong can be costly, but it’s also impossible to avoid making bets on where you expect markets to go. Especially when there are abundant warning signals that markets could be about to tumble, isn’t it irresponsible not to watch your timing?