Market timing often gets a bad rap, primarily because it’s tough to consistently pull off in a way that boosts profits. More commonly, people just stick with passive index funds. But really, what we often dismiss as market timing is simply part of every investment decision we make. Whether consciously or not, we try to make the best decisions based on the information available to us and our current situation.
Here’s the real deal: a “profitable decision” could mean buying stocks when they’re about to increase in value or selling them before they plummet. But it can also mean making transactions that enhance your life quality right now because, ultimately, the goal of investing is to live better.
Market Timing Examples You Might Overlook:
– Contributing a fixed percentage of your paycheck to a 401(k) each month might not seem like timing the market. But what if you chose to max out your 401(k) by mid-year or delayed until you got a year-end bonus?
– Holding off on investing until you’ve saved up a year’s worth of living expenses, or deciding to pay off your mortgage with all your monthly cash flow instead of investing some? These are all forms of market timing.
– Selling part of your S&P 500 stock because it’s way over its historical valuation? That’s market timing, too.
Why Long-Term Investing Usually Wins:
The truth is, it’s hard to consistently buy low and sell high, which is why long-term investing generally yields better returns. It’s more about holding your investments for as long as possible and adjusting your portfolio when necessary. This approach keeps you from getting too bogged down in short-term fluctuations that typically don’t affect the long-term growth of your assets.
However, you should adjust your holdings when your asset allocation gets out of balance or when you’re putting new capital to work. This requires having a clear opinion on each investment before you make a purchase. For instance, when writing about the real estate market, I concluded that buying a property about 18 months after a market peak could offer the best deals.
Real Estate vs. Stock Market Timing:
I’ve been investing in both stocks and real estate long enough to have made plenty of mistakes and gleaned significant insights. Real estate tends to be a slower-moving market compared to the rapidly fluctuating stock market, which can make it easier to time. For example, real estate transactions aren’t instantaneous. They can take weeks to finalize, providing ample time to renegotiate or even back out based on new market information.
Moreover, real estate transactions offer room for negotiation, which isn’t possible with stock prices. You can discuss prices before making an offer or renegotiate after inspections during the escrow period. Real estate’s slower pace and negotiability provide a tactical advantage over the quick-trigger nature of stock trading.
Navigating Market Cycles:
Understanding where you are in a market cycle, whether dealing with stocks or real estate, is key. With real estate, if you understand the cycle, you can better time your entry and exit, making calculated moves based on predictable patterns of market behavior.
For instance, if you’re eyeing a real estate purchase, timing it right after a downturn can lock in lower prices before the market rebounds. Conversely, in stocks, you might wait for a dip to buy or sell before a predicted drop.
Final Thoughts:
While it’s easier to make informed decisions in real estate due to its slower pace and negotiability, both markets require a good sense of timing and market phases. Whether it’s deciding when to buy a dream home or choosing the right moment to invest in the stock market, understanding the broader economic indicators and personal financial goals is crucial.
If you’re considering dipping into real estate, especially in a softer market, platforms like Fundrise can be a smart way to invest passively. They focus on properties in areas with potential for growth and offer an accessible entry point into real estate investing.
In essence, whether it’s stocks or real estate, every investment decision involves some degree of market timing. The key is to make informed, strategic choices that align with both the market conditions and your personal financial goals.
