cedarbear;842781756 said:
OK, I know more about this than I do about football and basketball...
Trying to time the market, especially in something like a 401K where your time horizon is decades long, is a fool's errand. Markets can go up for much longer than what might appear rational to you. If the market goes up 20% from here and you've switched to cash, what are you going to do? Stick to your guns, you say? What if it goes up another 20% once again after that? At some point, you'll probably admit defeat and jump back in....which might be exactly when the market tanks.
Say you do get it right and the market falls right after you get out. On the downside, people tend to get more bearish at precisely the wrong moment: when there's tons of bad news and stocks have gotten killed. At times like that, staying in cash seems like such a sensible thing to do. But market rebounds are inevitably sudden, sharp--and usually happen when you're still on the sidelines, trying to be sensible by holding cash because the news is so bad.
Even if you get lucky in one cycle, I guarantee you're not going to be able to get it right every time. You'll end up leaving a lot of money on the table because you missed out on market rallies that happened when you thought stocks were too expensive to own. Save yourself the trading commissions--and the stress.
Warren Buffett has it exactly right: buy stock in excellent companies that don't have a ton of debt, do generate a lot of cash, are in businesses where they have a sustainable competitive advantage, and whose stocks are not trading at stupid valuations. And then hold them for many years. If that's too much trouble, buy an S&P 500 index fund and hold it forever. In aggregate, the US economy and US companies will be innovative and adaptable; betting on them over the long, long term is the right thing to do. You can diversify by doing the same thing with a Russell 2000 index fund, since small-caps will likely outperform large-caps over the long-term.
This is great advice. For funds, especially index funds, I think putting money in on a regular schedule and just forgetting about trying to time macroeconomic conditions is the only way to go. I invest heavily in funds with low turn-over and low fees (generally Vanguard) and have not liquidated any portion of any funds in decades through all of the ups and downs.
However, for individual companies, I try to focus on maybe 5-10 companies where I read closely the MD&A to focus on trends and reasons for YoY comparisons, calculate their free cash flow margins and conversions, see industry trends, see management turnover, organic revenue growth, operating margin growth, profit margin expansion, and how they allocate their capital and what their trend is on return on invested capital (do I trust them to invest the capital better than I would if they paid more dividend). I would say that I look at those at least every quarter with their earnings release and 10-Q/10-K filings, mainly because it is fun to take part in my investments. But I try not to get attached and am ready to reduce investments if necessary on a quarterly basis. Even the great companies can face an innovation issue, new market trends, etc. I wouldn't want to keep holding them for many years unless they continue to have what made me want to invest in the first place. I wouldn't speculate based on market timing, but I think it is fun to try to understand where the company is going relative to the industry and market, and pull out or put more in depending on quarterly assessment. Graham once stated that (to paraphrase), in the short run, the market is a voting machine, but in the long run, it is a scale. I think, however, over time, the contents of the scale can change.
