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Not saying sell at the top and buy at the lowest point. No one can predict that. Let's assume, the Dow will go to 18,000 and then within the next five years, due to crash, dropped all the way to 11,000. Why not, sell it now at around 16,500 and buy it back around 13,000?
Because it's exactly as you said: nobody knows what the DOW will do next month, let alone five years from now.
The only solution is a time-averaged cost basis. My strategy is buy when the market is good, and buy more when the market corrects. Because if a doomsday scenario ever does happen ... well, money won't be important anymore, will it?
Because that is guessing and not investing! The Dow could go to 25,000 and then crash to 18,000. Who knows... Instead, you should be long during a bull market and be short during a bear market.
Since no one seems to have any ability to predict the stock market, rebalancing has been used as a technique to get some marginal gains. Rebalancing means keeping a constant percentage allocated between different asset classes. If the stock market increases, rebalancing would require selling some stock assets. If the market decreases, rebalancing would require buying some stock assets. Rebalancing has been shown to somewhat improve investment performance. It also goes against human nature. Human nature causes us to invest when the market is doing well and to sell when the market has done poorly. These steps magnify risk and losses.
It seems to me that rebalancing also needs some common sense rather than just a strict application of a rule. Personally I am slightly modifying the typical rebalancing plan. I have a relatively low stock market allocation so I am avoiding selling stocks. Bonds and other fixed assets are currently performing poorly and are risky due to inflation in the future. I do not want to move more money to this asset class. As a compromise, I am not selling or buying but will watch the market for another year or so. I do think there is a strong possibility of continuing stock market growth with very little risk of a major downturn. Although I am delaying rebalancing for now, I do expect to correct that within a couple of years. Politics has the potential to rock the boat... from either more liberal spending programs or conservative craziness. I will be rebalancing before the next Presidential election.
...and what's the chance it will go up to 16-18k, and not go below 12k during the next recession?
...and what's the chance of the market dropping in 3 months to 9k?
You are gambling gains hoping to time the market on a marker no one is sure will even be hit, or if it will go lower in order to chase a lower basis. Market timers clap themselves on the back when the market goes up, and cry when it goes down, watching it anxiously day after day. An investor finds good companies, and rides the swells of the market, with calm measure.
Since no one seems to have any ability to predict the stock market, rebalancing has been used as a technique to get some marginal gains. Rebalancing means keeping a constant percentage allocated between different asset classes. If the stock market increases, rebalancing would require selling some stock assets. If the market decreases, rebalancing would require buying some stock assets. Rebalancing has been shown to somewhat improve investment performance. It also goes against human nature. Human nature causes us to invest when the market is doing well and to sell when the market has done poorly. These steps magnify risk and losses.
It seems to me that rebalancing also needs some common sense rather than just a strict application of a rule. Personally I am slightly modifying the typical rebalancing plan. I have a relatively low stock market allocation so I am avoiding selling stocks. Bonds and other fixed assets are currently performing poorly and are risky due to inflation in the future. I do not want to move more money to this asset class. As a compromise, I am not selling or buying but will watch the market for another year or so. I do think there is a strong possibility of continuing stock market growth with very little risk of a major downturn. Although I am delaying rebalancing for now, I do expect to correct that within a couple of years. Politics has the potential to rock the boat... from either more liberal spending programs or conservative craziness. I will be rebalancing before the next Presidential election.
In your first paragragh you describe the definition of rebalancing and admit no one has the ability to predict the stock market, but then in your second paragraph you try to predict the market by saying youre not going to move money to certain asset classes and you are going to 'watch' the market for a year or so..
This is market timing behavior that you admit doesn't work in your first sentence...
This is also why people who come on these forums should beware of advice given....
I agree. It appears that I am not taking my own advice and am attempting to time the market. That is not entirely true. I already have a fairly low equity allocation. I would actually like to increase my allocation, but instead I am not buying or selling. If the market has a downturn, I am ready to begin buying as is consistent with a rebalancing plan. Since I am low in equities, I will buy at a fairly high rate.
To me market timing means trying to predict the market and moving to an allocation which would be favorable. Instead I adjust my position based on what the market actual does. I have only attempted to time the market once. Prior to the recession in 2008, I had a substantial cash position with an allocation of roughly 50% cash, 25% equities, and 25% bonds. In 2009, I bought stocks but I really failed to buy enough, fast enough. I made a mistake and followed an advisor's cautious advice. Everyone, myself included, seemed to be worried about a second downturn.
Rebalancing is a wonderful tool but even so, I would not recommend blindly following a rebalancing formula. First stock market "cycles" are anything but smooth and cyclical. Typically there is no such thing as panic buying. The market often grows slowly over a long period of time. Panic selling is a real possibility. Especially now and for several more years, investors are sensitized and worried about downturns. Downturns can be quick with rapid declines. With a little common sense the investor can adjust rebalancing based on the typical pattern of slow growth followed by rapid declines. Those sorts of adjustments are still rebalancing and not based on timing the market. I have no idea what the market is going to do. If it drops I will buy. If it continues upwards I will start to sell. I am merely delaying my selling because my allocation is short.
I ran a few quick calculations and came up with a 51.345% probability. But I may be off just a little.
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