In the church of personal finance, market-timing is a cardinal sin. The high priests of investor education inveigh against its temptations. “Market timing is a truly wicked idea,” writes Charley Ellis in his classic Winning the Loser’s Game. “Don’t try it!”
Empirical research validates the ecclesiastical dogma, demonstrating that market-timing—attempts to exit the stock market before downturns and reenter before upturns—damns its practitioners to subpar performance.
A Morningstar study, “Staying Invested Beats Timing the Market—Here’s the Proof” is one account of the wages of sin. In Common Sense on Mutual Funds, Vanguard founder Jack Bogle presents others. His verdict: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”
The investment managers that oversee much of America’s retirement savings subscribe to this creed:
- Fidelity advises investors to remain invested through good markets and bad.
- Charles Schwab explains that market timing tends to backfire.
- TIAA, the retirement provider established by Andrew Carnegie for educators and non-profit researchers, warns that market timing is “extremely risky, and even the most experienced investors get tripped up by it.
- Vanguard cautions that “timing the market is futile.”
Compulsory market-timing
When we exit the labor force, however, these same managers force us to market-time with what may be our most valuable asset, the savings accumulated in our workplace retirement plans.
In late 2023, my wife and I decided to simplify our portfolio by consolidating an old workplace plan with our primary provider. We completed the paperwork. On September 29, 2023, the custodian confirmed that it had cashed in my wife’s $25,700 mix of 60% stock funds and 40% bond funds and transferred the proceeds to our primary provider.
The funds then vanished. On October 6, 2023, they resurfaced in a money market fund. We moved the money into a mix of stocks and bonds, consistent with the pre-transfer allocation. By October 7, 2023, the funds were reinvested in the stock and bond markets. If we had been able to move my wife’s asset allocation at the previous provider directly into a similar mix at our primary provider, we would have earned 0.4%, or about $100, over the seven days in paperwork purgatory.
That’s not life-changing money, but it’s a nice dinner for two.
It could have been worse—or better.
I calculated the returns of a balanced portfolio (60% U.S. stocks/40% U.S. bonds) in every seven-day period since 2001—more than 5,800 rolling returns. The best return: 11.1% in the seven days through November 4, 2008. The worst: -13.9% in the seven days through October 9, 2008. (Best and worst returns tend to cluster.)
And a seven-day transfer is quick. Vanguard notes that “rollovers typically take 2-4 weeks to complete.”
That’s a lot of time to be out of the market. In the 28-day periods since 2001, the 60/40 balanced portfolio has returned as much as 18.6% and as little as -22.5%. Imagine a middle-income worker who accumulates $500,000 in a workplace account. At retirement, the worker rolls these dollars into an individual retirement account (IRA). According to historical data, a four-week exit from the market could cost this retiree as much as $93,000. It could also protect him or her from a $112,500 loss.
In retrospect, the risks and rewards of market timing are clear. But in prospect, they’re invisible. That reality is the basis for personal finance catechisms about market-timing’s danger.
My k-plan
I recently left my employer. I worked there for 25 years. I accumulated assets in my workplace retirement plan that will be the foundation of my family’s financial future. I’d like to roll these assets over to an IRA, which would simplify portfolio management and tax-planning. But I don’t want to be out of the market for seven days or four weeks. I belong to the church of personal finance and obey its injunctions against market-timing.
I’m leaving my assets in the 401k plan, forsaking any financial-planning benefits from account consolidation. I’m also scratching my head.
When my children need cash, I Venmo the funds. The money is there before the phone call ends. When we dine out with friends, we settle up with Zelle before we push back from the table. I’m puzzled that investment managers have failed to create a process that would allow us to instantaneously transfer an asset allocation at one provider to a similar mix of funds at another.
There’s a business opportunity here. I hope someone will seize it.
–A. Clarke