Why are people so quick to recommend against waiting to invest at the time of the next bear market/large dip/recession/correction?

I submitted this at personalfinance and got torn apart by people some of which didn't even bother to read the post. Some people made good points and I agree that what I'm saying doesn't always apply. I am not saying "don't invest now", if you want to, go for it. I'm simply writing what I think is a good strategy to make better gains.

All over the internet and especially in places like /r/investing etc people repeat the term: "Time in the market beats timing the market", "nobody can predict the market", etc etc. I'm not saying these views are necessarily wrong. But they aren't right either. If I'm wrong, feel free to explain to me but I just don't see it.

I've made a crappy table on MS paint to show my point: https://i.imgur.com/qOrKolQ.png

Now I'm making a couple of assumptions here which follow:

1. Most importantly, I'm referring to short/medium term investment into a well diversified index fund. (Here I use the SP500 index). Of course, if you leave your money in the market for 20, 30 or 40 years, as in retirement accounts, historical data shows you would almost certainly have a positive ROI. So this doesn't apply to investment over a lifetime.

2. The objective of investing is to buy securities low, get a positive ROI and sell higher than you bought, to receive a profit. I think its safe to say this is what almost everyone is after.

3. Nobody can know the highest point of a peak or lower point of a dip, however I am referring to purchasing once it is clear that the market is dropping, not specifically at the lowest point of the dip; and selling when the market has recovered overall, not right before the next dip. For most of my examples I use a 5 year period.

4. When I say words such as "recession" I am not using the terms per textbook definition. I understand a recession has specific characteristics which classify it as such; however I use the word as most people in the world use it - a time when the market drops, confidence is low, companies fail, people lose their job etc. Let's not get terribly technical.

5. That the market will always recover and continue to go higher as time goes on. This is the concept the entire retirement investment concept is based on. so when we buy at the dip, we suppose the market will recover some time soon.

6. The market is cyclical and even thought we hope it will continue to rise overall, recessions happen at an almost stupidly easy to predict rate.

• In scenario 1, we suppose we purchased shares right at the peak of the 2000 bull market. Exactly 5 years later, we happen to need cash and so liquidate at a loss for a return of -16.05%. We bought high in a good market and sold low. Now you could keep your shares and wait until the market turns around; however even if you waited until the peak of the recovered market around July of 2007 (and you'd have to be really lucky to guess that exact point), you would only make a 5% positive ROI, over SEVEN years of ownership.

• In scenario 2, we purchased shares at the very tip of the "recession" in October 2002 when it was clear to everyone that the market was at a decline. 5 years later, we decide to sell to realize our gains and make a 51.57% ROI. This is 67.62% more than the guy who bought the Dot Com peak in scenario 1; and 46.57% more than even if that guy had waited until the very tip of the 2007 peak who also owned his shares for 2 more years than scenario 2 guy.

• In scenario 3, we take a more realistic approach as we do not know exactly when the peaks and valleys are. We buy in February 2007 right before the recession because "people predicted 9 of the last 5 recessions" and "time in the market etc". 5 years later we need to liquidate and sell at a loss for a -4.87% ROI.

• In scenario 4, we kept our cash until the housing bubble burst and the recession was underway. Everyone's freaking out and we purchase in October 2008 because we think its the lowest it will go. Obviously it doesn't, it kept getting lower. however, that is what most likely would happen as nobody knows where the bottom is; but its obviously a recession and it'll have to go up soon. Turns out we were right and a little less than 5 years later we decide to realize our profit and sell for a 41.02% ROI. You made 45.89% more than the guy in scenario 3 simply by waiting one year until the market was obviously at a low and stocks were at price/undervalued.

Now you might be saying: "but Nakuke, if scenario 3 guy had simply waited until today and the crazy bull market of 2017, he would have made a lot of money! Stay long! HODL!" You're right, and we'll address that in the last 2 scenarios.

• In scenario 5, we buy in November 2006 while the market is still rising, and we're even willing to hold medium-term for over 10 years (12 to be precise). On In March 2018 we decide that the market is too crazy with the tariff business, Amazon regulation etc etc. we decide to sell and take your profit. We made almost double at a 91.26% ROI. Sounds good right? Except it could have been better and almost guaranteed a return if we simply waited 2 years until the market went to crap. This is next.

• In scenario 6, we decided to save our cash and buy in in the middle of the recession, not even the bottom of it. We stayed almost equally as long as scenario 5 guy, holding for almost 10 years until March 2018 when the market starts going bonkers and we decide to GTFO to secure our profit. We almost quadruple our investment for a 173.06% ROI. We made 81.8% more than scenario 5 guy by simply waiting to buy during the recession (waiting/saving cash for 2 years). We probably were able to invest even more than our scenario 5 self because we had 2 years to save more money in cash before using it to buy shares of the index. There was also no point during the period where the market took a dip large enough to give us a loss, and there was no point where it was very clear that the market would start to decline into the next (inevitable) recession, except maybe 2015; in which case you still would have beat scenario 5 guy if you sold out of fear.

Why I'm writing this:

I am not some sort of investing guru, in fact I started to invest (a small amount) money into the market in January of this year; which was pretty crap luck for me and others who did so. the last 5 years or so have been nothing but growth and rise, and now this year the market's doing weird things nobody understands due to new loss of confidence in the market and unfavorable conditions (tariffs etc) The last 4 recessions took place almost exactly 10 years apart: 1981, 1990, 2001, and 2007/8. If this continues, its reasonable to believe the next recession/dip etc will take place some time this or next year. We may even be "overdue". The price of most stocks, particularly tech and meme stocks (AMZN, NFLX, etc) have risen dramatically since the last recession and I don't think its irrational to say many of them, and the market overall, is overvalued. Buying into the market now is the perfect example of "Buying high" which makes it much more likely you will sell low unless you're ready to wait 10-20 years to make a profit - in which case you may as well just put your money in your 401k/IRA; or simply keep your money - the opportunity cost of waiting 10-20 or more years to even double your investment, at least for me, is too great. Giving up a dollar I can use today to make another dollar to use in 20 years is a waste.

In the past 2 months the value of my investment has dropped around 8% and its not a huge deal as its a small amount of play money (1000 USD); but it made me think and come to this conclusion. Stocks are at an all time high right now. I'm literally buying shares the their most expensive price in history. I'd have to wait a long time for the next all time high to make a relatively small profit. Instead if I hold my cash and wait for the market to drop - which it more than likely will sooner than later as history has shown time and time again, I can almost guarantee myself a profit in a shorter period of time. That is precisely what I have decided to do. I sold my small investment for the 8% loss and put y money back into a high-interest savings account with the rest of my cash. I'll continue to save for 1 or 2 years when I very strongly believe the market will be at a lower point than it is now. Then I'll buy a much larger number of shares low, wait for the recovery, and sell high. It's "timing the market" but it's not exactly rocket science. Just BL,SH. This does NOT apply to my TSP account. I've started to invest in my TSP each month in equal amounts regardless of market performance as I will not use the money until retirement time or at least until 30 years or more from now. Although I COULD make more money by putting in a lump sum during a recession, its easier and more disciplined to simply save the same amount each paycheck - the length of time is so large that it makes the difference in profit pretty small.

If my reasoning is not solid I am very happy to read why. I don't suggest I am absolutely correct. However I hope this can give people a perspective before they spout buzz phrases like "Time in the market beats timing the market", "ALWAYS buy and hold, start now!", "Insert Warren Buffet/Lynch quote here" regardless of whether the market at the time of the question is at an all time high and likely to turn around sooner than later.

Submitted March 29, 2018 at 05:51PM by Nakuke https://ift.tt/2Glcy2Y