Updated: Sep 17, 2021
A friend recently asked me if I was going to write anything about timing the market? So here it is, you can’t time (predict) the market, but you can be prepared to take advantage of market dips if you want? These crashes happen on a regular basis, and for any myriad of reasons. Really,… the markets are affected by any news or situation that erodes investor confidence to the point that it causes a huge exit of cash (lots of people selling off shares for cash) from the market, which in turn drops the market caps and the associated share prices. A market crash, or market correction, is considered to have occurred when there is a 10% plus dip in the index, but mini-corrections of +1-3% happen all the time . Even though these happen, you may not be able to react quick enough to take advantage, unless you are glued to a market tracker, have set up buy points below your ACB, and/or have access to a computer 24-7.
Problem with trying to time market crashes is you never know what event is going to affect them, what market/s they are going to happen in, or what asset classes will be impacted. You also never know how low they are going to last or where the bottom is. It could also be a broad base decline across all markets and assets, like the Covid pandemic showed us could easily happen in mid-March 2020. In this case, despite the early warning signals of a pandemic being underway in Nov 2019, it was only after a world-wide pandemic was acknowledged and travel was being shut down in early March that investors took notice. The only certainty with market declines is that they will happen, and lately they have been occurring at a higher frequency. In the last 30 years the frequencies of these occurrences have steadily increased. In fact, since 1990 there has been a market crash on average every 1-2 years in one market or the other. Compare this to the prior 30 years between 1960 and 1990 where crashes occurred every 4-5+ years and you can see the changing dynamics of bear markets. I'll be curious to see how the investment community reacts if a Covid-like situation happens again in next 5-10-15 years, and how behaviours may change due to the quick recovery and ensuing bull market that followed Covid? If you were paying attention, you would have seen which companies faltered through the pandemic, and where the value shifted and was placed. Shares related to travel and recreation are still recovering, while technology and financials recovered and ran up quickly, for example. People piled into gold for awhile after because this is what they were taught to do in times of uncertainty. So gold prices and stocks enjoyed a bit of a run-up only to come back down to normal values in the following months.
Why have these correction frequencies picked up? Well it’s anyone’s guess really, but I have some of my own theories. Technology has changed dramatically, which impacts everything in terms of worldwide efficiency. Investors can now react much quicker to sell-off their investment holdings in response to any negative news using the widespread digital trading platforms now available, versus the old snail’s-pace-call-your-broker and shout “SELL-SELL” programs. Another thing that has changed is the ability for investors to buy well-diversified exchange-traded funds, or ETFs, listed on the various stock exchanges. With more and more investors taking the path of buying ETFs holding hundreds of stocks over buying single stocks, capital is now spread across increasingly diverse markets and assets. But this comes with issues that weren’t there before. As a result of the rising popularity of ETFs, and the huge growth in the market caps in all these funds spread across lots of different markets and assets, when investors get spooked and sell off ETF holdings in mass, they affect the asset classes and/or world markets more than ever before. Mutual funds are much harder to sell in this respect. See the blog “ETFs versus Mutual Funds” for a clearer understanding of this. So the combination of technology making sell-offs quicker, and ETFs making the effects more broad-based, the speed and impact to markets are greater. I only see this paradigm continuing to shift and the future bear market cycles to be quicker, more impactful, and not last nearly as long as they did 30+ years ago because investment migration back to the market is also quicker too.
I would say, in this regard, having your funds held by a decent financial institution and under the watchful eye of a good Advisor, if you can find one, when you are possibly subject to emotion-driven investing might be a good thing? Holding your investments with a financial institution insulates you from your emotions and ability to make bad mistakes by making it harder for you to take action on selling your holdings at a loss, then buying them back at a premium. They also diligently set up and manage your DRIP plans for accumulation or withdrawal plans for retirement decumulation. I’ve had pretty negative experiences with two large financial institutions in Canada during my savings years, so any recognition beyond these benefits comes hard for me. I believe anyone can educate themselves and with a little effort and planning, beat the job being done by these institutions.
So now that I’ve rambled on a bit about markets, investor confidence, crash frequencies, shifting technologies, the ETF paradigm, and my own jaded view of financial investment institutions, it’s time to get back to the question, “Can you time the markets?”.
The cryptic answer is “sort of”. But like everything in life you need a bit of education and a plan, and you need to program your own thought process to take advantage of both DRIPs and occasional large market dip. Personally, before I retired, I liked to continually maintain 5% of my portfolio in cash, while building up another 5% through the year. I never set up a structured, monthly DRIP program in my accounts with my online brokerage platform. I would simply accumulate cash through the year in all accounts through general savings, dividends as cash, work bonuses, tax returns, etc. This way I had a pool of at least 5% to reinvest in the market at some point every year. If market dips happened and my ETF holdings were significantly below my average cost basis (ACB) I would buy back in with the 5-10% I had in my reserve and drive my ACBs lower. Of course these big crashes didn’t happen every year, and I would find a point in the year to buy back in near or slightly below the ACBs with any cash in excess of 5% to keep my money working for me, maintain that 5% reserve, and let it build again.
This worked for me rather well, although the math says automatically DRIPping monthly into your investment accounts gives you an average market price over the long term, while consistently taking advantage of compounding your returns through the continuous addition of shares and their associated dividends. In the end, the ultimate goal is to achieve the lowest average cost on your shares so when and if you need to cash them in during retirement, you are not taking major capital losses and can always get your value back out. The lower you can drive your ACBs, the easier it will be for you to mentally to cash in shares, and the more you potentially make when cashing them in to generate your retirement income. You can use your own percentages for your own plan, which could be more than the 10% or less.
Now that I’m retired I still keep cash in reserve, though much less (closer to 3-5% total) and for slightly different reasons, like having it on hand as retirement income to ride out surprises. I like to have it so I’m not at the mercy of market declines to cash in our shares significantly below the ACBs, or for any unexpected expenses through the year. Being in a decumulation phase, having a reinvestment plan in your RIFs and LIFs is not as important any more as you are trying to cash out these accounts in the most tax-efficient manner possible. So now I just let these reserves build up for withdrawal. Any modest savings I can accumulate in our retirement I’ll pick and choose market entry points now, but those entry points will very likely be big market crashes, and I’ll re-enter into value ETFs and/or stocks.