Financial Confessions: I’m A Market Timer

Those of you who follow my other personal finance and investing blog,, know I have always advocated setting a reasonable asset allocation and staying the course through good times and bad. Most importantly, I have come out against market timing again and again and again. I believe nobody can reliably time the market, myself included.

That said, I have a confession to make: I’m a market timer.

How I’m Timing The Market Right Now

market timer

Photo Credit: Candie_N

I feel like a bit of a hypocrite here, but I am currently timing the bond market. No, I’m not one of those sky-is-falling bond bubble fanatics, but I do believe it’s reasonable to assume interest rates are probably going up in the near future. I also believe that if they do, long-term bonds are going to get hit relatively hard.

So what exactly am I doing to time the market? My asset allocation currently calls for me to invest 10% of my portfolio in short-term bonds, which I do. Probably two years ago, I decided it would be better for me to invest in intermediate term bonds (specifically, Vanguard’s Intermediate Term Bond Index Fund) for two reasons:

  1. With such a small allocation to bonds, I feel lengthening the majority a bit for what bonds I do own will provide better downside protection in a recession. Longer-term bonds tend to do better in a falling interest rate environment, which is precisely what tends to happen in a recession. Because they have such a short maturity, my measly 10% allocation to short-term bonds doesn’t offer much ballast when my stock holdings tank. An intermediate-term bond fund won’t offer much protection, either, but it will be ever-so-slightly better in this scenario.
  2. I have a very high risk tolerance. Of course, anybody can say they have a high risk tolerance when times are good, but it’s when the fit his the shan that you really find out how much risk you can handle. I’m proud to say I easily kept my emotions under control during the recent recession even though I lost, well, a lot of money. To that end, I’m comfortable taking on slightly more risk in exchange for a good chance of slightly more return. There’s a chance I’ll regret this move, but since I will be increasing my bond allocation to 20% when I reach age 35 (per my pre-determined investment policy), I’m comfortable making the move.

So What Am I Waiting For?

So how exactly am I timing the market? It’s more a matter of what I’m not doing. I’ve been delaying the move from short-term to intermediate-term bonds for the last two years because I keep thinking, along with pretty much everybody else, that interest rates simply have to go up soon. Just how much longer could rate stay so low?

Well, I said that two years ago and I’m still waiting. I still think rates are going up, but I’ve managed to back myself in a little corner here. When exactly should I make the switch? The original plan was to wait for rates to get back to more historically-normal levels, but when exactly will that happen? To be honest, I thought we’d be there by now (or at least close to it). It could be next year or, at this point, it could be next decade. I really have no idea when I should make the move, which is causing undue stress.

Does It Even Matter?

Here’s the kicker: it doesn’t even matter! The worst-case scenario for bonds really isn’t all that bad. At worst, I’ll probably be down 5-10% over the course of 3 or 4 years. Over the long term, of course, it will all even out. So long as my time horizon is longer than the 6 year effective duration of the fund I’m going to transfer into, and it is, it shouldn’t matter one bit to my long-term returns. And yet, I just haven’t been bring myself to make the move for purely irrational reasons. After all, I invest 90% of my portfolio in equities. Why, then, should I be concerned with a 10% loss I’ll completely recover from within a few years? Loss aversion is a tricky bias to overcome. Needless to say, I’ve finally decided to just go ahead and get it over with: I’m going to make the move when I rebalance this year.

What would you do in my situation? Would you bite the bullet or hold out for a more favorable interest rate situation?

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