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It's been said time and time again on this site: You can't time the market, you just can't. I understand the logic behind this, but lately I've been thinking about a somewhat related scenario and I would love to hear your thoughts on this.

While you may never be able to know when the markets are at their heights or lows, couldn't you leverage the fact that fluctuations will no doubt occur? The bible (I'm not religious, but still) informs us that the cycle of economical up- and downturns is old, very old, and other sources seem to agree with this notion. I myself am in my mid forties and I've seen several in my lifetime, they seem to occur on the order of magnitude of decades. It seems that the saying "after rain comes sunshine" applies here. Always, as far as I can tell.

So consider the following very simple investment strategy, executed by someone young enough to see it through:

Whenever there is an economic downturn (as evidenced simply by a majority of economists saying: "hey, we're in a downturn") you invest your money into a diversified portfolio that closely resembles the economy as a whole. Now you wait until there is a upswing (as evidenced simply by a majority of economists saying: "hey, we're in a upswing") and you cash it all out. Rinse and repeat.

Would such a strategy be viable?

Edit: I'm not asking about maximizing profits here, in fact quite the opposite, I'm wondering if this would be viable as a low risk, low reward kind of strategy.

Edit 2: I'm very much aware nobody knows when the economy will be at it's peak, or when it's at its lowest. However, last year I was very much aware we were on an upswing, just like in 2008 I was very much aware we were in a downturn. In this context, that knowledge would be enough. (Or if it isn't, please enlighten me but again, I don't care about missed opportunity or maximum profits here).

Edit 3: As I commented on @BobBearker's answer, which somewhat but not entirely addresses my thoughts: I always understood "timing the market" to mean "knowing when it peaks or bottoms out", which wouldn't be required for this to work, neither would (I think, not sure) knowing the high point or low point. So let's say buy at -15%, sell at +15%, to make it a little less vague (edit: this was terribly distracting, should have kept it vague). And when you miss your opportunity because of a sharp reversal you simply wait for the next time. I guess what I'm asking is: Could you leverage the fluctuations by themselves, without knowing anything else but: "what goes up must come down and vice versa".

P.S. I've used the words "upswing" and "downturn" because I was looking for a proper translation for the dutch words "hoog- en laagconjuctuur" but couldn't find them. Boom/bust as I understand it seems to relate to the excesses, not the "normal" fluctuations, but feel free to edit or suggest words that would better convey that meaning.

  • How many economic depressions do you think you will experience during your lifetime? How many would you like to experience? – Flux Jul 24 at 9:03
  • @Flux, I have seen about 3 in my lifetime, 4 if you count my childhood and (to me at least) they seem to be a fact of life, this is why I'm asking this question. What I would like does not seem very relevant to me. – Douwe Jul 24 at 9:07
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    I don't see the "twist" in your strategy. It's straight market timing. And it does not work because you have no reliable way to identify your upswings and downturns. – WerKater Jul 24 at 9:32
  • @WerKater the "twist" would be that you would only have to be "somewhere" in an upswing, that's why I mentioned the economists. You wouldn't have to know how high or how low it would go, or when. You just have to be in the ballpark. Also I never even suggested this would work, in fact my money is on that it wouldn't, I would just like to gain more insight in the topic. If I have a strategy that I'm sure of would work, I'm not telling anyone. – Douwe Jul 24 at 9:59
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    @Douwe how do you know when you'd sell again? How would you know when to buy in the dip? There is nothing really wrong with the approach you're presenting if you don't panic when it dips another 10%, but it's no different to normal "random" buy and wait for increase because the market always goes up over time. You might as-well buy at a high because the high might not be over, we don't have the information. – Jonast92 Jul 24 at 10:38
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Whenever there is an economic downturn (as evidenced simply by a majority of economists saying: "hey, we're in a downturn") you invest your money into a diversified portfolio that closely resembles the economy as a whole. Now you wait until there is a upswing (as evidenced simply by a majority of economists saying: "hey, we're in a upswing") and you cash it all out. Rinse and repeat.

You can't time the market but yet you just described timing the market.

So, you have lots of cash available. Along comes a 2000 or a 2008-2009 when the market dropped 50% over 15-18 months. Do you invest when it's down 10% while it's on the way to down another 40%? At 20% down? At 30% down? What happens if you don't invest when the market is down say 20% and it reverses sharply? All you then have is still your cash, eh?

Or consider the opposite. The DJIA bottomed out at 6,800 and then rose to 29,000. How would you know that 15,000 or 20,000 or any number was the high point? If you thought so and cashed out, how many years might you have to wait until it retraced to a buy level, if ever?

There are a number of ways to achieve your "low risk, low reward kind of strategy." It involves options and hedging. Rather than guess what the market is going to do, you actually let what the market does determine your actions.

Describing hedging in detail is beyond the scope of this space. What I achieve with such hedging is playing in the middle or as you stated, a "low risk, low reward kind of strategy" - but significantly more upside potential than fixed income. I own some large large cap stocks bought this year that have lost 1/3 to 1/2 their value to date and yet my retirement portfolio is slightly up for the year. Nothing to brag about but given the circumstances, I'll take it.

Most investors only look at the reward side of investing and completely disregard any form of risk management. In a nutshell, here's what I have learned in 40 years:

  • 1987 taught me that the market can take a lot of money away from your rather quickly.

  • 2000 taught me that one can indeed get out of the way of a 50% drop in the market long before the bottom.

  • 2008 taught me that not only can you get out of the way of a 50% drop in the market but you can also make really good money when the market craters.

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  • I always understood "timing the market" to mean "knowing when it peaks or bottoms out", which wouldn't be required for this to work, neither would (I think, not sure) knowing the high point or low point. So let's say buy at -15%, sell at +15%, to make it a little less vague. And when you miss your opportunity because of a sharp reversal you simply wait for the next time. I guess what I'm asking is: Could you leverage fluctuations by themselves, without knowing anything else but: "what goes up must come down and vice versa". – Douwe Jul 24 at 11:34
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    @Douwe My experiments trying to model the +15%/-15% idea with 20+ years of FTSE data (see my answer to Buying shares when the price goes down 2% and selling shares when it goes up 2%) showed that it was far from reliable. Whatever pair of rates you picked might be optimal for one period, but lose in another. – TripeHound Jul 24 at 11:43
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    The DJIA bottomed out at 6,600 in 2009. If you sold at +15% or at about 7,600 a month later, do you know when the next time you saw 7,600 was? Never. Let's say that you waited 4 months and after a 10% correction, out of desperation and with perfect timing you bought back in at 8,100. In a coupla months you sell at +15% (circa 9,300). Do you know when the next time you will see 9,300? Never. Are you feeling how bad a timing strategy this is? – Bob Baerker Jul 24 at 11:45
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    @Douwe - If you could find something fluctuating between two extremes (what and when those extremes... isn't relevant, just the fact that between those extremes there exists a space where the "signal" would always return to) you could theoretically leverage that in a market setting. Different idea than the +/- 15% strategy but what you described is the basis of pairs trading where you are seeking to capture reversion to the mean between highly correlated securities. Yes, they exist and it's a mechanical strategy rather than an opinion strategy based on when it's a good time to buy or sell. – Bob Baerker Jul 24 at 15:03
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    @Douwe - My mention of a pairs trading strategy is one of the many types of mean reversion strategies alluded to in Philip's link. Hedging can indeed allow you to make money (for example, sell an option for a credit). However in the context of previous discussion, consider a no cost option collar on stock XYZ which is at $100. Say it's a long $90 put and a short $110 call. You have the potential to make $10 and lose no more than $10 and that fits right in with your search for a "a low risk, low reward kind of strategy." – Bob Baerker Jul 24 at 18:07
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More or less, you reach this goal with rebalancing:

If you hold, say, 70% of your assets in stocks, 20% in bonds and 10% in cash, when the stocks go down by 20%, you readjust by buying more stocks until you have the above ratio back.

OTOH, if your stocks go up by 30%, you readjust again, e. g. by selling some of your stocks.

The same holds for bonds.

The problem is, as usual, finding the right time to do this: do you do it based on some triggers? Or in regular time intervals?

The problem remains: Whenever you buy, you cannot be sure that the prices won't go even more down, making you miss an opportunity. And whenever you sell, you cannot be sure that the prices won't go up in the next days or weeks.

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  • Thanks for your answer, I've edited my question to reflect that missed opportunity is not that important in this context, the triggers would simply be a consensus among "most people" that we're either in a up market or a down market. Those triggers really can't be missed because in practice they reflect on everything from government spending to consumer confidence to job reports. Ie: last year everyone knew we were in an upswing (even though nobody knew when it would end, or how) just like in 2008 everyone knew we were in a downturn. It's leveraging those fluctuations I'm wondering about. – Douwe Jul 24 at 10:15
  • Many people say that you can't time the market and yet rebalancing is a good portfolio approach. Rebalancing is just a fancy word for timing. Your description aptly describes both: "The problem is, as usual, finding the right time to do this: do you do it based on some triggers? Or in regular time intervals? The problem remains: Whenever you buy, you cannot be sure that the prices won't go even more down, making you miss an opportunity. And whenever you sell, you cannot be sure that the prices won't go up in the next days or weeks." – Bob Baerker Jul 24 at 10:41
  • @BobBaerker In this context I really, really don't care about missed opportunity. Like I wouldn't when I would simply buy and hold, or some other blue-chip/dividend scheme. If this would make me a reasonable profit I would consider it "viable", no matter how much more I could have made in other ways. For me, the thought exercise is about leveraging the fact that fluctuations will occur, without really knowing when or by how much. – Douwe Jul 24 at 10:53
  • For a lower risk/reward strategy, buy investment grade preferred stocks which currently yield 5+ pct (USA). With some occasional swaps, when there's an interest rate cycle you can bump that yield up, sometimes to 2-3x. There's no guesswork about when to buy or sell (+/- 15%). In full disclosure, these aren't risk free. While they periodically correct 10%, in 2008 and in March of this year they were hard hit. If you could withstand the drawdown, you'd still collect your 5+ pct and much more with new money added. Also, not a good time to initiate now due to sharp rise due to Fed support. – Bob Baerker Jul 24 at 12:29
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You're mistakenly thinking that good news in the present indicates bad news in the future, and bad news in the present indicates good news in the future.

In reality, the expected return of the stock market is pretty much independent of what has happened before. There are some correlations, but they're too weak to really suggest any viable strategies other than buy-and-hold.

It sounds like you've noticed that in the stock market, every period of increase is followed by a period of decrease, and every period of decrease is followed by a period of increase. However, that's a totally vacuous and meaningless observation, because in any possible time series (except for those which eventually stop increasing or stop decreasing), every period of increase is followed by a period of decrease and vice versa.

If you stand by a roulette wheel and start making a chart that increases when the wheel comes up red and decreases when it comes up black, it'll look a lot like a stock price chart. It'll have fluctuations and cycles just like the stock market does.

The problem is that if you know that the market has gone up recently, you have no way of knowing whether we're in the middle of a period of increase or at the end of one. Both possibilities are equally likely, so the information about what the stock market has done lately is useless.

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Also worth noting on top of these other excellent answers that this way of thinking can also get you into weird gamblers fallacy territory quickly. A random walk on coin flips has substantial dips below expectation (eg long runs with many more tails than heads and vice versa) but buying heads after long strings of tails isn't a positive expectation bet even if you define the entry and exit points nice and cleanly as n number of standard deviations away from normal etc.

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  • As I understand them, coin flips act like booleans (can only be heads or tails, 1 or 0) which would not allow for the fluctuations I'm asking about. Applied to coin flips, this strategy would amount to zero risk / zero reward if you would allow a limitless number of tries. I'm looking for a theory behind leveraging fluctuations. So far, everyone is telling me I'm wrong which I know/suspect (and I will always ask from the "wrong" position, that's what gets you answers on S.E.) but I'm sure there is more to this than has been said yet. – Douwe Jul 24 at 13:21
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    Analogy is same for any random walk producer though: the stock market in many ways resembles the sum of a daily roll of something like a dice with 10,000+ sides of varying degrees of positive and negative values and an overall positive expectation over time (can also see these exact distributions in option price curves and how the market prices all the future price fluctuations on this metaphorical 'dice'). – Philip Jul 24 at 13:38
  • That overall positive expectation is the best thing since compound interest as far as I'm concerned :) I know it's not guaranteed, but let's for the sake of argument say that our empirical data is enough to treat it as such. Now let's plot it as a line, and plot two more lines, one a little above it and one a little below it. Those lines are our buy and sell points. Also we allow copious amounts of time to level it off so to speak. Would I make a notable profit? I guess no, because everyone would be doing it otherwise, but why?... – Douwe Jul 24 at 14:00
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    In the pure random case, the same reason it doesn't work in the coin flip example: the events are memory less and every day your expected value is the same as it was the day before on and so on. People do use a range of strategies in markets based around what roughly what you are talking about here grouped under the umbrella of 'mean reversion': investopedia.com/terms/m/meanreversion.asp – Philip Jul 24 at 14:07
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    Pension funds would happily invest in a positive expectation roulette wheel (indeed, this is what gambling/insurance businesses are). Holding a portfolio of insurance and gambling companies could be argued to be basically this exact process in action in that specific corner the stock market. – Philip Jul 24 at 16:01
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The main problem with your proposal is that the length of bull markets vary hugely, and can extend for more than 10 years. If you cash out the minute some economist or news outlet says we’re in an upswing, then you’ll miss the vast majority of gains.

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  • I addressed that in my question, you're right in that it would be a very wasteful strategy that would lead to lots of missed opportunity. However I would argue that the main problem is something more fundamental. – Douwe Jul 27 at 9:12
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Whenever there is an economic downturn (as evidenced simply by a majority of economists saying: "hey, we're in a downturn") you invest your money into a diversified portfolio that closely resembles the economy as a whole. Now you wait until there is a upswing (as evidenced simply by a majority of economists saying: "hey, we're in a upswing") and you cash it all out. Rinse and repeat.

The problem here is "cash it all out". Stocks yield 7-8% in the long run. Currently, in many parts of the world, interest rates are near zero or even negative.

So, stocks have an inherent 7-8% advantage over bonds in the current low interest rate regime. In 3 years (accrued interest), that is 23%-26% advantage.

Now, if you can time the market so well that you can time the peak at an accuracy of 3 years (most can't), it works only if the drop in stock prices is over 23%-26% -- otherwise you're making a loss compared to all-stocks all-the-time portfolio.

I agree that it is a good idea to invest more in times when stock prices are low and invest less in times when stock prices are high. For example, when the coronavirus crisis started, I deposited all my physical cash to my bank account, started to use credit cards for all daily purchases (at that time I decided to purchase only food and not any durable goods such as bicycling or camera gear which I occasionally purchase) in order to have as much buying power for stocks as I can have, and invested nearly all of the free money I had into stocks. In hindsight, that turned out to be a good idea. Yet, when I encouraged others to do the same here at money.stackexchange.com, some of my answers were downvoted by prophets of doom. Those prophets of doom made my desire to purchase stocks even greater -- generally, when nearly everyone is fearful of stocks, is the best time to purchase stocks.

It has been said:

Be fearful when others are greedy, and be greedy only when others are fearful.

When the stock prices recovered faster than I expected, I started to buy again camera gear and bicycling gear. I stopped my regular investments to stocks as my strategy of increasing my portfolio size all the time was taken care of increasing valuations of stocks. I also sold all of my ownership in Tesla for 1750 USD / stock, as I could no longer justify its valuation at that price. Yet I did not sell any stocks other than Tesla, because even though their valuations recovered, I cannot say that the valuations are clearly too high.

At some point of time, I'll probably have lots of free money again and I have to resume buying stocks (other than Tesla unless the valuation of Tesla normalizes).

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  • That's a quote by Warren Buffet if I'm not mistaken. Before I asked this question I couldn't have told you that, after this rainy weekend with a lot of reading I can see where you're coming from. I guess you were downvoted for the same reason academics are critical of value investing, it goes against established group-think. But mean while Warren Buffet and others from his school are making bank time and again. I had a small windfall late march which I used to by stocks, funny thing: Some of the same people told me you can't time the market told me "this is a great time to buy stocks" ;) – Douwe Jul 27 at 8:01
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What you're describing is an investment strategy known as buying on a Really Bad Day. This is discussed many times on the Boggleheads forum, and is well worth researching. I think that the general consensus is that the RBD strategy doesn't beat the baseline much. And certainly not that much to worry about.

Differentiate this from a simple re-balancing strategy. If the share market moves higher, then the balance of shares to bonds will now be skewed towards shares. Re-balancing involves selling shares and buying bonds. Essentially, this "sells when the market is up". Likewise, when there's a downturn in the share market, your balance is now skewed towards bonds. So sell bonds and buy shares. Ie, buying when the market is low.

This is probably a better strategy for you in the long-term.

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  • "doesn't beat the baseline much" Nice to see it is actually tried, and to see it behaves the way theory would predict. I'm not really looking for a strategy though, I was doing something unrelated when I figured this might, maybe, possibly, could be an investment strategy. I posted the question to satisfy my curiosity and learned a lot in the process. But to hear it has been tried in practice is really nice, thanks. – Douwe Jul 28 at 8:58
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I found my answer elsewhere:

No it is not viable as an investment strategy.

I guess what I'm asking is: Could you leverage the fluctuations by themselves, without knowing anything else but: "what goes up must come down and vice versa".

Yes you can identify predictable price fluctuations in many corners of the economy. And no, "knowing when the peak will be, or how high or low it would be" would not be required to make a profit in such a situation, so you actually wouldn't be timing the market. But that wouldn't matter because even in a theoretical perfect setting without any additional costs or constraints, the best you can ever hope for is to break even. Anything more would be dumb luck.

Because even if you're not timing the market, you are still beating the market. And that requires that you know something the others do not. And because in your scenario everyone is seeing the same fluctuations you are, this is simply not the case. This, like timing the market and other would be strategies, all boils down to Efficient Market Hypothesis.

Some algorithms do indeed exploit fluctuations much in the way you describe, but this is not where the value is. The value is in identifying what fluctuations to exploit.

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