Timing the Market? – Finance Post #1

Over winter break, I discovered my late grandmother issued US bonds in my name when I was born. They’ve grown significantly and now I have extra money! Thanks Grandma! In addition to these bonds, I have been saving cash in a savings account¹ because I heard the market was going to belly-up around February 2020. This act of savings was in fear of the inverted yield curve signal back in March 2019. Watch this 4 minute video to learn about the inverted yield curve and see my fearful perspective. Anyways, I fell in these three buckets. Can you relate?

1. Nervous to invest from finance-news narratives that the market will soon crash – the yield curve inverted!
2. Received a lump sum of money, or, keeping extra cash in a savings account.
3. Debt-free with an established emergency fund – investing ready!

The last few years I’ve taken a keen interest in finance and this week stumbled across the perfect two articles to affirm my stance and feel confident with what to do with this excess cash. (Not an exercise of confirmation bias, but strong convictions against my prior judgements.) Shout-out to author Nick Maggiulli and the entire Ritholtz Wealth Management LLC group for A+ financial content².

Let’s look at my first bucket item: I’m nervous the market will crash and therefore am waiting to invest until the market falls. I am essentially trying to time the market.

First article: Why Market Timing Can Be So Appealing

Nick walks through an investing scenario where a theoretical investor perfectly times the market and buys at the “absolute bottoms” from 1970-2019. On the contrary, Nick models a scenario where an investor consistently adds to the market, known as Dollar Cost Averaging (DCA). In comparing total returns over the 49-year period, the perfect, yet unrealistic, “absolute bottom” buying strategy, outperforms 22% of the DCA strategy. Nick calms this excitement by stressing this 22% outperformance over a 49-year period is disappointingly only a 0.4% annual increase. Moreover, this scenario is very improbable with the investor perfectly timing the market. Case closed! It is not worth being consumed by the 24-hour finance news cyclone trying to time to market for this slight performance gain.

Now, on to my second bucket item: How should I enter the market with my excess cash?

Second article: How to Invest a Lump Sum

Nick showcases the benefit of entering the market with a lump sum opposed to DCA! Hold on, didn’t I just support a DCA scenario for investing in the market? Yes, I did. However, with a lump sum Nick introduces “missed potential growth” and answers the question, “Should I invest this money immediately or over time?” From 1960-2018, Nick compares the performance of a lump sum investment to DCA with variable time intervals to enter the market. As an investor increases the variable time intervals for DCA, the outperformance increasingly favors the lump sum investment. The article contains great animations highlighting this concept. The caveat to where DCA outperforms the lump sum is when the investor times the market perfectly to when the market is falling. What did we learn about timing the market from the previous article??… Nick concludes that time is better spent in the game than on the sidelines because the “fear of being left behind” should be balanced by the “fear of a market crash.”

So, in summary to both of these articles I will…

A. Invest my excess cash as a lump sum into the market³.
B. Quit the habit of excess saving and instead immediately and routinely invest in the market, following the DCA method.

P.S. How do I invest? More on that later, but for starters, I strongly recommend checking out Betterment. I use Betterment. My referral link is here.

P.P.S. If you can’t relate to my third bucket item, listen to Dave Ramsay. He’s pretty verbose but fundamentally right about getting out of debt. Baby Steps Video. Youtube Channel.

¹ I use an online high-yielding savings account named Ally. As of Jan-2020, rates yield 1.6% interest. For perspective, the National Average Interest Rate for a United States checking account yields 0.06%. That is nearly a 27X difference.

² I love Masters In Business and Animal Spirits podcasts, enjoy The Compound YouTube channel, and follow Michael Batnick, Ben Carlson, Josh Brown, Nick Maggiulli, and Barry Ritholtz on Twitter.

³ Disclaimer: I am investing for my retirement with this extra cash. The market could flip, and I could lose 40% in a day. I can emotionally tolerate this risk because I have 40+ years ahead of me. If I was saving for a down-payment on a home with this money in the next 5 years, I would choose a less risky strategy. In another post I will get into different investing philosophies and how knowing your behavior can impact your strategy.