I Told You So

Back in late February (which now feels like a lifetime ago), a colleague and I were chatting about the stock market.

The S&P had just gone down through the 3,000 mark. The said colleague, who happens to be a very thoughtful person, mentioned that he was worried about the prospects of a pandemic and had therefore cashed out his entire equities portfolio of roughly $1m.

“Things will get worse before they get better.”

Boy, was he right or what?

Within the next three weeks, the S&P 500 had collapsed by another 25%. It would probably keep on plummeting had the Fed not intervened on that fateful Sunday night, finally injecting a dose of stability by promising to flood the markets with liquidity.

Fast forward another 3 weeks. Mid-April, the S&P was back up to ~2,850.  The same colleague and I were preparing for a client call (this time, on Zoom) when he said:

“I feel like I missed my chance to get back in.”

He ended up sitting on cash for another few weeks, by which point the S&P had blown back up and through the 3,000 level. Then he finally accepted the situation and put his cash back to work.

A Numbers Game

There is no schadenfreude in this story.  I like and respect the guy.  He isn’t a show-off and he never gloated about making the right call just before the market began its frightful descent.

Instead, I reflect on this story as the perfect encapsulation of just how hard it is to time the market.

History tells us that between 1946 and 2018, the S&P had gone down by 10% or more on 26 separate occasions.

Market Corrections

Courtesy of CNBC

In addition, there have been 12 bear markets in that time period.

Bear Markets

Courtesy of CNBC

In total, 36 declines of 10% or more.  On average, that’s once every two years.

Sometimes, there may be some indication a meltdown is coming.  In retrospect, the exponential rise in the number of Covid cases had given us a proper heads-up.

But many other times, there is no rhyme, reason, or warning, and the market simply corrects out of the blue.

The problem is that simply having the supernatural prescience that allows you to anticipate market corrections five times a decade doesn’t mean you’ll be able to profit from them.

The additional challenge with market timing is that you’ve got to be right twice: when you initially cash out AND when you subsequently get back in.

I’ll leave it to you to decide whether you can consistently make the right call every single time.

To me, it’s the equivalent of a running hot streak at the roulette wheel. It involves zero skill, there’s a minuscule probability of it happening, and at some point, it’s bound to end.

The other problem is that significant up and down days in the stock market occur in close proximity to each other. If you happen to be off by a day or two, this is what ends up happening to your returns:

Stock market returns take a hit if you waver

Source: JPMorgan

The Other Side Of The Story

While my colleague was sitting out the meltdown, another equally fascinating story was playing out in the UK corner of the personal finance blogosphere.

Fire V London, having just sold his house, had £1m of cash to put to work. And off he went, a spectacular example of holding one’s nerve while there was more than a trickle of blood spilling onto the streets.

When times are good, it’s easy to convince yourself that you’ll be ready to pull the trigger and take advantage of buying opportunities like the Covid pandemic.

Not so much when everything is going haywire.

Now, I would never advocate buying single stocks, but that’s beside the point.  Because a full six months and a complete market recovery later, I still find Fire V London’s behaviour highly impressive.

It’s one thing not to sell in a downturn (tick).

It’s another to keep buying – when the buying happens automatically, as it does in our workplace pension plans (tick).

But it’s a totally different level to proactively go in and put extra money to work when the world is collapsing, and everyone is urging you to run for the hills while you still have a chance.

As Napoleon once said:

“A genius is the man who can do the average thing when everyone else around him is losing his mind.”

Another Chance

If Mr. Market caught you flat-footed back in March, don’t despair. More likely than not, another opportunity will present itself over the coming months.

The first market wobble came when it transpired that the vicious market “melt-up” may actually have been caused by Softbank buying up billions of call options on tech stocks.

Just a few weeks later, it seems to be wobbling again.  There are many reasons for it.

The proverbial winter is coming.  A vaccine is still some time off.  Second lockdowns loom large across the world.

There is absolutely no doubt we will get out of the woods at some point – but we are still far from it.

In the meantime, we all know how this story will play out.  Should the market lose another couple hundred points (as it always does on its relentless march upwards), panic will set in yet again.

Most investors will rush for the exits, crystallizing losses along the way.  Along the way, they will shout at everyone who will listen:


“I told you the market was disconnected from the economic reality!”

“It simply couldn’t last!”

“The house of cards is finally coming down!”

Sadly, a few months later those same investors will lament the opportunities missed, alongside everyone who heeded their advice.

Perfect Timing

If at this point in time timing the market still looks appealing to you, let me give you something else to noodle on.

Here is an excellent writeup from Personal Finance Club on why market timing is a suboptimal strategy.

You should really take the time to read it, but the TL;DR summary of it is that a steady contribution strategy actually beats the ability to call the market.

It’s counterintuitive.

It goes against what most people do during market corrections.

Let’s admit it – it’s also uncomfortable scary as hell.

And yet, it works.

At the end of the day, successful stock market investing requires very little skill.

You don’t need a PhD in finance, an expensive financial adviser, or a powerful computer sitting right next to the exchanges.

All you need is the ability to hold your nerve. If you haven’t got it, start working on it now. It may come in handy sooner than you think.

Happy investing!

About Banker On Fire

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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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17 thoughts on “I Told You So”

  1. Great post as always! I was very lucky to be a reader of this and some other great blogs, which meant that I didn’t feel the need to panic during the market collapse. I started investing twice a month instead of once when things got very volatile, so I ended up buying at the very bottom, although it wasn’t a vast amount. I think pound cost averaging works very well in these market conditions.

    1. Glad you held your nerve!

      I think the reassurance in the PF community takes on even greater importance when everyone around is piling for the exits.

      I think JL Collins is the master of calming people down in those circumstances, apparently he even released a guided meditation for market downturns 🙂

  2. Hi BoF,

    I am very well aware of the fact that I cannot time the market, as well as the fact that I should not sell, but rather buy when the market crashes. During normal economic times, I am in the ‘ready’ state, even hoping that a crash comes, so I can take advantage of it.

    HOWEVER, when the actual crisis comes, as it came in March, it’s not so easy anymore (as you’ve pointed it out). You see news headlines of trillions being wiped out, everybody panicking, people losing their jobs, while your employer’s bottom line is also heavily impacted, and the only thing you can think about whether you are next one on the list. If so, you better preserve liquidity – I told myself (even though I have 3-6 months of emergency savings for these situations).

    Eventually, I ended up buying, but it was tough to get in. Thinking back, I may have got in, because I just started out investing (after several years of expensive education), so the amount invested was still relatively small. Despite this, it was a good mental “training” for the next crash.

    I am starting to think that the only way to make sure you keep investing is to go with index mutual funds, instead of you buying ETFs yourself (as I do at the moment). If I may ask, is there any particular reason why you buy ETFs instead of just investing in an index mutual fund that tracks the same index (SP500)?


    1. It’s totally natural to feel nervous about investing when everything is getting wobbly. Everyone feels that way, the key as you point out is a way to overcome that very natural hesitation.

      To me, the best way to do it is through a pre-authorized withdrawal from your bank account.

      My workplace pension is an automated investment process whereby I do my Vanguard purchases manually.

      There are some differences between mutual funds and ETFs (primarily around how they are traded and quantum of investment) but setting up a pre-authorized investment program is critical.

      Hope this helps!

      1. Thanks for your reply!

        You wanted to say that you do your Vanguard purchases automatically, not “manually” right?

        Does your broker offer automatic ETF purchases (i.e. pre-authorized withdrawal from your bank account) or are you only investing manually there as well as automatically through your workplace pension? None of the brokers available to me allow for that (mainly because of fractional shares), so I have to buy ETFs manually. (I’m not from the U.K).

        Benefit of index funds is that they allow for automatic purchases; disadvantage is that they have a minimum account balance requirement (which is often too high for young investors like me).

        1. Cheers DC. To clarify – my workplace pension is automatic, Vanguard on the other hand is unfortunately manual which isn’t ideal (and perhaps I simply haven’t figured out a way to automate it).

          It sounds like you may simply need to set a rule (i.e. buy on the first Monday of every month, irrespective of what’s happening) and build up the habit until you cross the threshold of the minimum account balance and can automate the process.

          It may be painful but the good news is that once you build up that “muscle” you can take additional advantage of market dislocations like Fire V London!

  3. I sense a lot of turbulence over the coming months given the myriad of issues facing us (think Covid 19, lockdowns, Brexit, US elections, trade wars etc etc … ). Winter is coming. A case of keep calm and carry on required.

    Great article reinforcing one of the key tenets of investing that market timing is indeed a fools errand.

  4. Your linked blog post (https://www.personalfinanceclub.com/how-to-perfectly-time-the-market/) above is very powerful, thanks for sharing. I think this is the final nail in the ‘time in the market vs timing the market’ I need to get my cash ISA into Vanguard. Maybe I missed it but I think all those numbers are expressed in nominal rather than inflation-adjusted, which will somewhat have an effect on the purchasing power, but I guess the author is simply trying to get the message across.

    Interesting to read though that even lump summing into the market bottom every single time still gives some extraordinary growth opportunities.

    1. You are right – I think all numbers are nominal.

      That being said, it doesn’t really make a difference because if you come out ahead in nominal terms, you come out ahead in real terms also.

      Like I mentioned in a reply to your earlier comment, I’d just divided up your cash pot into reasonably sized pieces and gradually put those in the market. You hedge the downside and get to ride the long-term upside.

  5. Thanks for the kudos, b-o-fire. And I love your graph (returns if you are fully invested, vs missing a few good days).

    Looking back now on my own post now, I am glad I don’t appear to have missed any land mines, but overall I was fortunate the correction was so short lived. If the market had languished in the doldrums, would you have cited my post? And if the market had dropped another 25%, would I be the village idiot? All just counterfactuals, which aren’t of much use.

    At the end of the day I have a high enough net worth (>50x my earnings) that I would still be ‘rich’ if it dropped by 50%, and I have drummed that into myself so much that I am somewhat on autopilot when the market drops. If my net worth was <3x my income, I think I'd find a 30% drop in net worth very much harder to stomach!

    1. Cheers FIRE v – and all valid points. It’s like flying a plane – there are things you do at 10,000 feet that you would never do just 50 feet above ground.

      I recall reading your post back in March and being mightily impressed while the market was still in the doldrums, so yes, I still would have featured you!

    2. It’s interesting you say this fvl I said the same. Not anywhere near your level but I am at about 10 times take home pay and the drop didn’t even feel real any more in march. For me it also helped looking at the drop on my pension which was twice my isa. I was certainly not going to stop paying into my pension so why would I not do the same with my isa

  6. I’ve understood the Buy & Hold / Don’t Time the Markets rationale for a few years now, but I must say I was tempted to sell a decent chunk of my portfolio after the markets had fallen maybe 20% because ‘they will fall further, then I’ll re-buy’. There were *countless* articles about the initial rally being a Bear Trap.

    Thankfully, I held steady. Turns out I would have been selling near the bottom and no doubt would have bought in again at a higher price! Glad to to have learnt this so early in my investing lifetime.

    1. At the end of the day, humans are social animals, that’s why resisting herd behaviour is so tough.

      Glad you held on!

      My rule is to NEVER sell until I’m in the withdrawal phase (unless I am rebalancing, but in times of market downturns that actually means buying more equities).

  7. One of the most important aspects of investing – thou shalt hold thy nerve.

    I think the drop in March / April was a good test for many new to FIRE. I was investing through the 2008 but only in a very small way having only just settled into the early stages of a new career. This time around I had much more in the market so it has certainly shed some light on by tendencies. I feel like I held up pretty well. I wasn’t tempted to sell, didn’t despair too much at my portfolio shrinkage and kept investing through a dip in my income.

    This experience has forced me to revisit my emergency fund allowance however, increasing it slightly. Still within the “normal” 3-6 months expenditure range but increased non the less.

    One thing that I heard several people mention was the preparation of an investment manifesto. An outlined strategy written at a time of clear thought to oneself which spells out your approach in testing times. I have since prepared a few “commandments” for myself to refer to the next time my net worth takes a substantial blow.

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