Should I sell my mutual funds when I sense a bear market approaching and then buy the funds again once the bear market is here to get them at a cheaper price?
I have about $93,000 invested in non-retirement mutual funds. I have been considering trying to time the market by selling these funds when I sense a bear market approaching (incurring a $1,700 capital loss), and then buying the same funds at a cheaper price once the bear market has arrived. I have no debt and an emergency fund. Is this a good strategy, or too risky?
Great question, and as you can see by the responses none of us are too favorable of the idea of timing the market. First you have to make two nearly impossible decisions. 1) When to get out, and 2) When to get back in. The reason these decisions are nearly impossible is because bull markets usually die in a moment of euphoria. Everyone wants in because everyone is making money. It will be emotionally difficult to pull your money out and watch the market go higher for potentially months later. Second, everyone is in a panic at the bottom and no one wants to invest cash until they sense a recovery. I do think trend followers can generally help cut out some of the losses, but like most things in life consider using in moderation. I prefer to make strategic shifts. Let's say you're in IVV which is an ETF replicating the S&P 500. When you think the end is near consider replacing it with positions like RSP (equal weight S&P 500) or CFO (volatility weighted ETF). These smart beta strategies can reduce your market risk but still allow you to participate in some of the near term upside. I also use mutual funds like JP Morgan Hedged Equity. It can help hedge downside risk when the equity market is down more than 5%. Wholesale changes are too difficult to time.
Good luck to you!
Matt Ahrens, CIMA®
Welp this would officially make you the first and only person to successfully "time" the market. So I guess my answer would be a resounding no. Warren Buffet can't do it, Peter Lynch couldn't do it, and unsure of your credentials but assuming you also won't be able to since it is virtually impossible. Did we not sense a bear market last year and yet we had a fabulous year in the market? I can tell you from years of experience this is a losing strategy. I'll leave you with a great quote from Peter Lynch, " more money has been lost anticipating and preparing for a correction than in any correction itself". That sums up my feelings exactly.
This is the million dollar question. Timing is one of the most challenging parts of successful investing. No one has a crystal ball so unless you are trading individual stocks I would invest for the long term. Mutual funds are not meant to be traded due to their structure.
By selling your mutual fund in a bear market you may also miss out when the market rebounds. Then there are also fees and tax consequences to consider.
Do you know when either will happen exactly and the exact date to get and to get back in? This isn’t meant to be a mean question it’s just that no one does.
We saw catastrophic chocies made in 2008 when people sold off and we saw it compound when they never bought back or when they bought annuities that capped at 3% so they missed the run up.
No one can predict the right time.
Now your loss piece is another discussion. Tax harvesting may help you take advantage of that loss without pulling you out of the market and playing the timing game.
Best of luck to you.