https://www.financialsamurai.com/market-timing-real-estate-stocks/
Market timing is the strategy of making buying or selling decisions of financial assets by attempting to predict future market price movements. By timing the market, the hope is to make an eventual profitable decision.
Market timing gets a bad rap partially because it’s difficult to do consistently to profit. However, I mostly believe the act of marketing timing is misunderstood.
In reality, every investment decision you make is market timing. As rational human beings, we are always attempting to make the best decision possible based on the information we have and the situation we are in at the time.
A profitable decision generally means buying at a time before future prices go higher or selling at a time before future prices go lower. But a profitable decision can also mean buying or selling to help improve the quality of your life. After all, the ultimate goal of investing is to provide us returns to live a better life.
Here are some common examples you might not think of as market timing, but in reality, they are.
You are timing the market if you are investing a fixed percentage of your paycheck in your 401(k) each month. Why not front load your 401(k) contribution so you’re done by mid-year? Or why not wait to max out your 401(k) with your year-end bonus?
If you decide to replenish your cash hoard until you have 12 months of living expenses before you invest, you are market timing. Why not wait to start investing in stocks once you have three months of living expenses instead?
If you decide to use 100% of your monthly cash flow to pay extra towards your mortgage instead of follow my FS-DAIR framework, you’re market timing. Why not pay down debt and invest at the same time?
If you decide to sell some of your S&P 500 holdings because valuations are 50% above the historical median valuation, you’re timing the market as well. Or are you making a disciplined decision?
If you decide to sell one of your rental properties because you don’t want to manage tenants anymore, you’re timing the market. The decision is based on your inability to endure dealing with tenant issues.
We all know it’s difficult to consistently buy or sell at the bottom or top of the latest market cycle. You could sell near the top, but then you have to time your purchase near the bottom correctly. Then there are tax implications when buying and selling investments in taxable accounts.
Therefore, when it comes to stocks and real estate, the best holding period is usually for as long as possible. It’s much better to identify long-term investment trends and asset allocate accordingly. Focusing on the minutiae to outperform the broad trend is often a poor return on effort.
However, whenever asset allocation percentages get out of whack you should buy or sell accordingly. Further, whenever you have new capital to deploy, you should always have an opinion about each investment before purchase.
In order to write, The Best Time To Upgrade Your Home Is Coming, I had to have a view on where the real estate market was headed. My conclusion was to buy your move-up property roughly 18 months after the latest peak in the real estate cycle to get the best deal possible.
In other words, I was practicing real estate market timing. I don’t want to buy a new primary residence now because I think there will be better deals in the future. Specifically, I think I can buy my move-up home sometime after July 2023.