One Way to Time the Market

Most experts agree that you should never, ever attempt to time the market. Mere mortals aren’t capable of identifying when the stock market will go up or down, so your best bet is just to stay invested in equities. Over the long term you’ll probably be just fine. Of course, some of the experts who say that (see Buffett, Warren) don’t seem to practice it all that well themselves, but I digress.

My track record of identifying market peaks and valleys is laughable, so I definitely don’t try to time the market. However, when the market’s been on a tear, I’m often selling some equities. When the market dips down, I’m buying. An outside observer might cry foul – my behavior certainly looks like market timing. What gives?

The force at work is my target asset allocation. In my portfolio, I’ve decided that my target % for equities is less than 100%. As a result, if equities go on a tear, they rise above (percentage-wise) where I want them to be; I need to sell. If the stock market tanks, equities go below where I want them to be; I need to buy. 

I don’t make these adjustments daily, but I do take a look and rebalance my portfolio from time to time. If I wanted a 50-50 split between equities and fixed income (I don’t, but let’s keep this simple), I wouldn’t get worked up if market forces put me at 55-45. I would, however, take action if a bull run left me at 90-10. While I get as excited as the next guy when my stock holdings go nuts, I have to remember that my target asset allocation to equities was made when I had a disciplined, cool head – I would do well to stick to it.

Sometimes, my rebalancing looks like brilliant timing. Sometimes, the market continues to rise after I sell or to drop after I buy. Overall, though, has it worked? Have I made more money by periodically rebalancing than by just letting things ride? 

I honestly can’t tell you (though my gut, given this steady, insane bull run, is “no”) because I don’t know and I don’t care. In my humble opinion, that’s not the right question to ask. 

If you were instead to just ask, “Has it worked?” my answer would be “YES!” My goal is to have a portfolio with a certain % exposure to equities, so my rebalancing, by definition, has worked. My asset allocation should allow me to achieve my financial goals, so making sure I stick to it is the priority. If I simply wanted to maximize returns regardless of risk, I’d be 100% (or more) in equities.

There are some folks who think anything less than 100% stock ownership is silly – since equities have historically outperformed just about everything, why wouldn’t you go all in? 

I might ask those folks to seriously think about risk. I’d also check back with them after the next bear market (for the younguns: a bear market is one where stocks actually go down). And finally, I would question 100% as a target equity allocation. When the equity % in your portfolio can sit anywhere from 0% to ~150% (through borrowing money / buying on margin), it seems incredibly arbitrary that so many people happen to argue for exactly 100.0%. 

I am aware that if I had been 100% invested in equities during the last 10 years, I would have more money than I do now (I did just fine in 3rd grade math, thank you). I’m also aware that if I had a time machine, I would be the world’s first trillionaire. In developing my investment strategy, I’ve always been forced to look forward, though.

If you’re really worried about your exposure to equities, you could pick a target equity allocation less than 100% that matches your risk tolerance. When you rebalance to maintain that allocation, it may look like market timing, but trust me, it’s not 🙂