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Common investment advice is 'Don't try to time the market, just pick a risk profile and stick with it'.

With the inverted yield curve and a fair bit of talk about an upcoming recession - it seems perhaps sensible to switch one's managed fund from an aggressive to a conservative one, or to invest in bonds over stocks.

To be clear - I'm not talking about timing individual stock picks.

Now of course, there's a timing issue here - assuming that a recession is going to happen, we don't know if it's going to start next month, in six months, twelve months or two years.

So making that switch too early means you lose that potential higher return.

But it does seem that, say you had a crystal ball and you knew when a recession was going to occur, then switching to a conservative strategy for that period is the smart move to make.

Am I wrong on that?

In any case - can someone expound the case for 'not trying to time the market'?

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    '...say you had a crystal ball...' do you have a crystal ball? – jcm Aug 15 '19 at 9:26
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    If he had a crystal ball he would know what the answer to the question was going to be. – DJClayworth Aug 15 '19 at 14:11
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    You go conservative or cash heavy and then it is announced that the trade war is resolved and rates are cut a full point. Now what? – acpilot Aug 20 '19 at 3:32
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But it does seem that, say you had a crystal ball and you knew when a recession was going to occur, then switching to a conservative strategy for that period is the smart move to make.

But you don't have a crystal ball.

To be clear - I'm not talking about timing individual stock picks.

...

switch one's managed fund from an aggressive to a conservative one, or to invest in bonds over stocks.

So even if you decide switching of funds is less problematic you are still talking about timing the market. You are talking about guessing the correct move and knowing when to make it.

But even worse you are talking about knowing when to make the move back to more aggressive funds. You have to get that right also or you will have problems at the end of the crisis.

So to do this right you have to be near perfect. Two times. If you do that last part wrong you can give up all that you gained by your perfect first move.

If your funds aren't in a retirement account, you have to consider the cost of taxes when you make these moves. Moving funds from one investment to another can cost you significant money. Which means you will on the first move to the less aggressive funds keep some of the money out of the market, so you can pay the taxes. That makes it even more important that you do these moves correctly.

The more you try and time the market the more the churn will get you. You also are trying to move in a way that predicts how the others will move. And by the others I mean the 401(k) investors, the mutual fund staff, and the pension funds. Some of these are highly intelligent investors, with access to all sorts of tools, others are just average people who are panicked about what they read. You have to guess about their moves also.

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  • Your point about taxes is important. They can have a significant affect unless the money is sheltered. I don't buy into the all or not concept of needing perfect timing. Protecting one's portfolio is a transition just like dollar cost averaging. You take a bite (out). If right, you exit some more. IMO, allowing one's portfolio to experience a decline of up to 50% (see 2000 and 2008) is financial malfeasance - and scary. You are not trying to predict how the others will move. You are simply following the only one true market indicator that never lies, namely the value of your portfolio. – Bob Baerker Aug 15 '19 at 12:37
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    @BobBaerker That is a very bad strategy that is basically guaranteed to reduce your returns. You propose responding to declines in portfolio values by shifting asset allocations. This means that after your assets decline in value, you will sell them and lock in the losses. Consider a temporary equity market drop like in December 2018. Your strategy would sell equity positions after market drops, and then would re-buy those equities after the market rebounded. You would lose money on both ends compared to a buy-and-hold strategy, even without considering transaction costs. – David Aug 15 '19 at 15:51
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I saw a nice sound-bitey phrase today that I think helps address this question. "It's not how you time the market, but time in the market."

That reminded me of an article I read (and I looked for a while, but couldn't source it, so please accept my apologies that I cannot properly credit the original author). He took 3 hypothetical people.

Each had $12k to invest. There was Lucky Louie (LL) -- he was able to buy at the lowest point in the market every year. There was Unlucky Urkel (UU) -- he bought into the markets at their peak every year. Lastly, there was Steady Sam (SS) -- he bought $1k every month on the 1st day of every month like a paycheck.

This article analyzed what would have happened had LL, UU, and SS started in 1990 thru today. In the end... there was only about 4% difference in the values of the best and worst of all 3 portfolios. The moral here being -- 30 years in the market that overwhelmingly is trending steadily up -- it is the time in the market, not the timing.

An even bigger point made by the article. Say LL's little brother was equally lucky, but didn't start until 2005. But, to make up for not starting at the same time as big bro, he invested $24k every year at the market's lowest point. Thru today, that is more or less the same total amount of money invested, but little bro's portfolio was only 60% of big brother's. Again, the many years of growth far outpaces the best timing in the world.

So, the arguments about not timing the market are really just trying to leverage the above knowledge. That, sure, no one likes to buy at a market peak. No one likes to log in and see red numbers. But the overall trend is up, and if you give your investments the time, they will almost surely follow that same trend. And most people would be best served by just steadily saving a little bit every check and giving that time to grow.

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    It has different details, but is this the article you remember reading? na-businesspress.com/JABE/SpahtC_Web16_6_.pdf – Doug Deden Aug 15 '19 at 23:24
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    @DougDeden, I know the article I read didn't have that many formulas in it, but in looking that over, I suspect that the one I remember was strongly based on this one. Excellent find, thanks for posting it. – R. Hamilton Aug 16 '19 at 13:54
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Don't try to time the market

Because everyone else is trying to time the market. In doing so, you/they are impacting the market, changing it. You are also not betting against "the market" you are betting against an aggregate of all traders - and wisdom tends to be found in the crowd. If you have better information than the others, you are basically a hidden inside trader - and can leverage your information at your own leisure.

Disclaimer: I moved all my investments to safer harbors two days ago, but not because I wanted to time the market, it is because I don't want to.

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    All trades made affect the market but the retail guy's decisions a but a blip on a pinhead. Whether you are a trader or a buy and forget investor, you're betting with or against the aggregate of all traders. – Bob Baerker Aug 15 '19 at 12:28

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