Market timing is all about trying to predict the future movements of market prices to make buy or sell decisions. It’s often seen as a risky strategy because it’s hard to get right consistently. But here’s the thing: every investment decision you make is, in a way, an attempt at market timing. We’re always trying to make the best decisions we can based on the information we have at the time.
A successful investment usually means buying before prices go up or selling before they go down. But it can also mean buying or selling to improve your quality of life. After all, the ultimate goal of investing is to make our lives better.
Here are some examples of everyday market timing that you might not have thought about:
- If you’re putting a fixed percentage of your paycheck into your 401(k) each month, you’re timing the market. Why not put in more at the start of the year, or wait until the end of the year to max out your contributions?
- If you’re building up a cash reserve equal to 12 months of living expenses before you start investing, you’re timing the market. Why not start investing once you have three months of expenses saved up?
- If you’re using all your spare cash to pay off your mortgage instead of investing, you’re timing the market. Why not do both at the same time?
- If you’re selling some of your S&P 500 shares because valuations are 50% above the historical average, you’re timing the market. Or are you just being disciplined?
- If you’re selling a rental property because you’re tired of dealing with tenants, you’re timing the market. The decision is based on your personal circumstances, not just market conditions.
We all know it’s hard to consistently buy low and sell high. And there are tax implications to consider when buying and selling investments. So, for stocks and real estate, it’s usually best to hold for as long as possible. It’s better to identify long-term investment trends and adjust your asset allocation accordingly. Trying to beat the market by focusing on the small details often isn’t worth the effort.
But when your asset allocation gets out of balance, or when you have new money to invest, you should always have an opinion about each investment before you buy.
When it comes to real estate, I believe it’s easier to time the market than it is with stocks. I’ve been investing in stocks since 1995 and bought my first property in 2003, so I’ve had plenty of time to make mistakes and learn from them.
Here are a few reasons why I think it’s easier to time the real estate market:
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The real estate market moves slower than the stock market. This is partly due to technology and globalization, which have made the stock market more efficient. Real estate prices tend to fade slowly in a down market and spike quickly in an up market. So, you can time the real estate market by buying after a one or two year decline and then holding for the inevitable upturn.
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You have more control over the timing of a real estate transaction. When you buy or sell stocks, the transaction is completed as soon as you press the button. But with real estate, the average time in escrow is around five weeks, and a lot can happen during that time.
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You can negotiate the price of a real estate purchase. With stocks, you have to pay the market price. But with real estate, you can negotiate the price and use various tactics to get a better deal.
Timing the real estate market isn’t easy, but it’s easier than timing the stock market. The key is to understand where you are in the real estate cycle and make an educated guess about how long the current situation will last.
The U.S. has just gone through a 10-year real estate bull market. Supply is still below the pre-pandemic average, but demand has declined due to rising interest rates. We could be at the end of the expansion phase and heading into a recession, which could last for two or three years.
As a buyer during a recession, your goal is to try and get a price that’s equal to what you think the bottom of the cycle will be. This way, you won’t have to compete with other buyers when the market starts to recover.
In conclusion, while stocks are a great way to invest passively, real estate offers more opportunities to negotiate and control the timing of your transactions. If you’re an experienced negotiator who can recognize potential, you might prefer real estate over stocks. And once you’ve built up a large real estate portfolio, you can invest in real estate online for passive returns.
