Is there such a thing as “timing the market,” or is this just a myth?
Is this something that people only claim to have done, in hindsight? Or are there crystal-ball readers out there who can actually foresee the ups and downs of a market cycle, and structure their investments accordingly?
It’s a timely discussion, given today’s Toronto market, and whether you’re a bull or a bear, I’d like to know if you REALLY think you can time the market…
What – you don’t like my videos? 🙂
After 109 comments, and counting, on last week’s post on 201 Carlaw Avenue and the “problems” they’re having (I put “problems” in quotations because many residents believe that their building is fine, nothing wrong at all, and it’s my opinion that a $2M loan at 5% interest, resulting in being blacklisted by mortgage insurers, isn’t a problem…), I hit rock bottom on Thursday with a video that produced ZERO comments.
Alright, I can take a hint.
You want a blog post that has a topic for discussion, or something that you can argue about. Something with teeth that will spark debate, and to be perfectly blunt – disagreement.
So here it is folks; here’s the question of the day: do YOU believe you can ‘time the market?’
We hear about this concept all the time, no pun intended.
And “timing the market” is different than “predicting the market,” since the latter involves a simple belief or opinion, and the former involves a belief that is acted upon financially.
I was on the stairmaster on Thursday evening, and I read two articles in the Globe & Mail, both involving timing the market, which ironically were on opposite pages of the Business section. One involved equities, and the other involved real estate. Both got me thinking about the idea of timing the market…
The first one was called, “Stick With Buy-and-Hold: Don’t Try Timing The Market.”
The author of the article analyzed the investing habits of a group of investors who bought index-funds and exchange-traded funds (low-risk vehicles), and how those that held for the long term compared to those that actively bought and sold.
From the article:
“Vanguard’s 500 Index Fund (VFINX), which tracks the large cap S&P 500 index, gained an average of 4.58 per cent annually over the past 15 years, but its investors only gained 2.67 per cent a year. The difference of almost two percentage points per year indicates that the fund’s investors tended to buy high and sell low.”
What does this say, in laymen’s terms?
It says that when people tried to use their brains, they failed. They could have sat on their hands, done nothing, and achieved a better return.
The second article was called, “Arizona Still Draws Snowbirds – Despite Price Rebound.”
The article profiled one Canadian couple who purchased a vacation home north of Phoenix for $269,000 in 2011, when it had sold previously for $399,000 in 2007.
I wouldn’t say that the article was championing this couple as having “timed the market,” but I would have to think that they, or somebody like them, somewhere, would pat themselves on the back for having successfully timed the market.
My question is: was this a combination of fortuitous timing and luck?
Unless this couple was watching the market in 2007, and saw that house, and others like it, sell for $399,000, and say, “This market is going to drop – let’s wait a while to buy,” then they didn’t really time the market; they just happened to buy when prices had dropped 33%.
So what IS timing the market?
Is it buying on a dip?
The Dow Jones Industrial Average peaked at 16,588.25 on December 31st, 2013, and dropped as low as 15,372.80 earlier this week. That’s a 7.3% drop in value.
So do you buy now?
If the market recovers, and starts to head upward again, that’s a very easy 7.3%, is it not?
If you bought an index fund that tracks the DJIA, S&P, or TSX on February 3rd, and the market recovered 7.3%, would you brag that you “timed the market?”
To me, I consider this “buying on a dip.”
I recall the tech boom in 1999, when I watched Nortel Networks, coming off a high of $122.50 months earlier, hit $50, then hit $55. Then $50, then $55. Then $50, before I invested in my very first stock purchase of my entire life – assuming the stock would naturally go back to $55 again, and I’d pocket a quick 10%.
Stop me if you’ve heard this story (since I’ve told it about a dozen times), but I sold the stock for $2.40 about 18 months later, and lost my entire life savings at age 19. There’s a lot of extenuating circumstances here, but I won’t get into the story today.
Just using this snapshot as an example, I wanted to buy Nortel “on a dip,” at investors in the equity markets do this all the time.
In the real estate market, we really don’t have that luxury.
We don’t have indexes that track every single movement of every single share of every stock, nor do we have the efficiency of billions of shares of stock being traded each and every day, down to the penny.
The only “dip” I’ve seen in the decade I’ve been selling real estate came after the financial crisis in 2008.
So how do you “time the market” in real estate?
Does anybody really know what’s going to happen?
Recall the story of my childhood friend, who told me in 2005, “You should sell your family home, and then buy it back for HALF THE PRICE in about two years.” As I’ve told you before on this blog (and quite recently, I believe), we hung on to the house, sold it three years later after it gained another 15%, and if we had it today – it would probably be worth 30-40% more.
For the last decade, I’ve heard about people trying to “time the real estate market,” but I’m slowly becoming of the opinion that it’s impossible to do so. And hear me out…
The stock market consists of essentially intangible assets, that have only a monetary value, and can be bought and sold with ease.
The real estate market consists of tangible assets, that you need to sustain life (in the case of a primary residence), that has tremendous emotional and societal value, and is costly to buy and sell.
You can buy and sell stocks any time you want.
If you’re going to buy real estate, it often comes after months or years of contemplation, and has major life implications both present and future.
When you buy or sell real estate is impacted and determined by your age, your job, your marital status, whether you’re planning a family, as well as where you are financially.
It’s not so simple to “time the market” when you’re busy living life!
Let’s pretend you’re a 29-year-old guy renting a condo in York Mills where you grew up, and suddenly you’re offered a fantastic job in downtown Toronto, you’re newly-married, and your wife is pregnant with your first child. You also just inherited a small sum of money from your grandmother, and you’re the last of your “posse” left living at Leslie and York Mills.
Wouldn’t you make a purchase decision based on circumstance, rather than timing the market?
Right or wrong – I’m just saying that timing the market isn’t an easy thing to do.
First, you have to actually have the foresight necessary to do so.
Second, you must have the circumstance to allow it.
If you’re a real estate investor, then that’s another story. But for the every-day person, I have to think your life cycle severely impacts your real estate purchase and sale decisions.
I was in a house earlier this week – call it my “dream house, circa 2019,” that was listed for sale at $2,895,000. I marvelled at this home, and thought about the colossal mortgage I hoped to be saddled with one day, and then wondered what the owner paid for it back in October of 2007.
I told my colleague, “I bet he paid, like, $1.9M, or something.” She said, “Oh, I bet it was less.”
When I got back to the office, I was absolutely astonished to see that he had paid $2,650,000, and thus he wasn’t going to make any money after acquisition and disposal fees.
Imagine – owning this house for 6 years, 4 months, and listing for $245,000 more than you paid for it – a 9.2% increase, or a paltry 1.46% per year.
Did this person overpay in 2007?
Or has the market for luxury homes just not risen nearly as much as that of the market average?
The average home price in Toronto in 2007 was $376,236.
The average home price in Toronto in 2013 was $520,398.
The average home price increased from 2007 to 2013 by 38.3%.
And yet, the owner of my “dream home” that is listed at $2,895,000 has only seen a 9.2% increase on his investment, which is assuming the house sells for the list price.
So when it comes to “timing the market,” you have to not only be right in terms of timing, but be right in terms of the specific product as well.
There is no “index fund” in real estate. You can’t just buy the S&P500, and ride the 30% increase that 2013 experienced.
I suppose you could buy a REIT, or buy a basket of properties – houses, condos, muliplexes – all across the GTA.
But the average person can’t do that. The average person is buying a primary residence.
And while the average person saw a 38.3% increase from 2007 to 2013, it would seem that some people would be fighting to capture 8%.
So talk to me about “timing the market,” and talk to me about strategy.
Because after all is said and done, I might be convinced that it’s all just dumb luck…
derek
at 7:22 am
Timing the market. Have a look at whats happening in London, UK. Complete insanity. People cannot afford the rubbish they are buying yet they are still buying. Late 80’s crash coming up. Why anyone is prepared to pay 950K for a house (small) 5 months ago and now it is valued at 1.25M 5 months later?
The same applies to Toronto.
House prices should track in line with inflation or just above particularly if you add value to it. Unless everyone get an exponential pay rise and there are two jobs for every person available. Last time I looked we were shedding jobs? Oh for the love of rich foreign investors screwing it all up.
Pete
at 8:16 am
The concept of “timing the market” is faulty in itself. It’s just a variation on “fate”. If someone buys low and sells high, they claim to have timed the market. But its only in retrospect that they can claim this, which is meaningless, because the outcome is already known when they make the claim of foreknowledge.
heineken
at 8:38 am
People are dreaming if they think they can time a market. When the rollercoaster price of homes is going up its very difficult for individuals to sell a home. Most people, think the price will keep rising. To sell the home at a high price and shift the profiits into another investment, very few are able to accomplish this task.
Paully
at 8:55 am
Sorry David, but there just wasn’t much to say about yesterday’s post, other than to reiterate your rule about not buying a condo that overlooks a parking lot…
I was in university during the mid-eighties. All that time I watched as prices rose beyond belief. I sadly accepted that I would never be able to afford to own property in Toronto. Ten years later, in 1996, a financial planner told me not to buy a condo since he still had clients that were buried in their late-eighties condo purchases. He thought that real estate was dead money that would never recover.
In both cases, we fell victim to a common fallacy: the belief that recent trends would continue forever.
In 1996 the condo was a screaming buy since it had fallen so much since the peak and would actually carry for less than rent. I bought the condo and saw a very healthy gain when I sold. That was not really my brilliance of timing the market, but rather my circumstances had changed to make me want to buy. I had a new wife and new job and it was just time. We bought a bigger condo and later sold it for a healthy gain too.
Today, I rent a house and could not be happier about it. My rent is easily less than 2/3 of what it would cost me to carry the house, P.I.T., if I had bought it, and I don’t have to pay for any repairs or maintenance. My landlord is subsidizing my lifestyle and I am just fine with that. The money that I am saving every month gets invested for the future, when perhaps the pendulum swings back to favour ownership.
If you believe that the long term trend for real estate prices has outpaced inflation and wage gains, then you have to also accept that prices or at least the growth in prices must ultimately fall. Mathematically speaking, annual compound growth in RE prices above the growth in wages and other prices can not be unending. In the long-run all properties would become ultimately unaffordable to most people, and prices would have to fall.
This boom market will end. It has no choice. Unfortunately, nobody really knows when that will occur.
Joe Q.
at 9:12 am
Good comment.
“Mathematically speaking, annual compound growth in RE prices above the growth in wages and other prices can not be unending.” — Others will come on this thread and attempt to prove you wrong, IMO twisting themselves in knots to do so. This part of the “fallacy” you describe — recency bias (http://bucks.blogs.nytimes.com/2012/02/13/tomorrows-market-probably-wont-look-anything-like-today/?_php=true&_type=blogs&_r=0)
Paully
at 9:21 am
Bring on the contortionists! Anyone that can’t wrap their head around where exponential growth takes you in the long-run should watch this series of videos about it by Albert Bartlett, professor emeritus of Physics at Univ of Colorado-Boulder. It’s powerful stuff.
http://www.youtube.com/watch?v=F-QA2rkpBSY
ScottyP
at 10:54 am
Cheers for that, Paully. Good stuff.
Joe Q.
at 8:56 am
David — I completely agree that one can’t “time the market” in RE the way some people claim they can with stocks — individual circumstances vary, there is no “index”, pricing in the RE market moves very slowly, and you can’t dollar-cost-average your way into a house. That said I don’t agree with the oft-touted logic that equates “you can’t time the market” with “it’s always a good time to buy real estate”.
To use your analogy, we could be in a 2007-like situation now, in which case stretching to make a home purchase will seem like a brilliant move in five years’ time. Or we could be in a 1988-like situation, in which case doing so will lead to financial catastrophe. “You can’t time the market” — no-one has a crystal ball — but that doesn’t mean it always makes sense to buy.
Kyle
at 9:19 am
Unless you are an investor, i think it is foolish to think of housing as a pure investment, because it does not behave like a pure investment. It always makes me laugh when i see otherwise smart people doing really dumb things, like these overly-complicated (and equally unrealistic) analysis of real estate (i.e. using financial ratios, charting prices, looking at bollinger bands, “head and shoulders” formations, looking at 100 year averages, or trying to figure out whether the “Canadian real estate market” is over-valued – hint there is no such thing as a “Canadian real estate market”). And it becomes glaringly clear that those people do not own, or have any clue about what owning, living and enjoying a house is about, because it is mainly the non-financial reasons that drive the vast majority of decisions to buy and sell and consequently real estate prices So no, i don’t think it makes much sense to time your purchase to what you think will happen in the market. I think it makes far more sense to time your purchase to what you think will happen in your life. I think people should pay far less consideration to where they think the market will go in the next five years, and far more consideration to whether they might need to move for work or family, what might happen to their incomes (return to school, mat leave, sick leaves, etc), or expenses (having kids, need for another car, house maintenance, etc).
With the high transaction costs, i wouldn’t buy a house, unless i was planning to stay put for at least 5 years, and if prices fell within that time frame, it would still satisfy all the lifestyle reasons i bought it for in the first place and if it keeps rising…then well i’ll tell people i have good timing!
Kyle
at 9:21 am
Well said Joe Q!
George
at 9:24 am
One could attempt to go back and forth between renting and owning their property, but transaction costs would kill that strategy.
Realistically for most people, the decision to buy or sell into the real estate market has very little to do with overall market predictions. People buy into or drop out of the market based on where they are in their lives.
Kyle
at 9:41 am
“Mathematically speaking, annual compound growth in RE prices above the growth in wages and other prices can not be unending.”
I totally agree with this, however one thing i would point out is that most bears look at wages of the entire population, but as i’ve often said, in a large city it is only the wages in the right tail of the income distribution that matter. And i’ve seen ample evidence to show that wages in the right tail have been rising just as fast as RE Prices.
http://www.urbancentre.utoronto.ca/redirects/rb41figure1.html
Joe Q.
at 3:15 pm
Those are good graphs. I agree that the wages in the right tail of the income distribution are important, but I don’t think that it’s only that part of the distribution that matters. After all, home ownership rates are very high, certainly in Ontario they are higher than they have ever been (>70% according to the 2011 NHS — take it for what it’s worth). If wages in the right tail of the income distribution are rising, those in the middle and left tail are falling, and yet home ownership rates are also rising, what does that mean?
Darren
at 9:43 am
I sold my condo in mid 2012 because I believe a long overdue correction is coming. Was my timing good? I’m not sure as I’ve not seen sales history in that building since, but I believe I did well based on the prices of listings I occasionally look at. I’ve been renting since and I can tell you that financially I’ve never been better off. It was the best thing I’ve ever done financially, regardless of the current prices in that building.
Long Time Realtor
at 9:59 am
Buying a home as a principle residence should be viewed as a long-term plan. .
The latest stats indicate that home owners in Canada who are mortgage-free, took on average 17 years to do so.
It is not unusual to be a home owner for more than 40 years (not necessarily the same home). Such a time horizon smooths out the volatility that all economies experience and I am living proof. I purchased my first home in 1988 and sold it in 1996 for $15,000 less than I paid. However, despite the loss on paper, I had paid down the mortgage consistently over those 8 years, such that I was able to purchase a larger home for much less than the same home would have cost in 1988. Nine years later, I sold that home and bought an even larger one in a better location, which I patiently paid off over time.
I am happy to report that I am now mortgage-free and sitting on a nice pile of tax-free equity. Since I plan to remain a home owner for many more years, I don’t worry much about the current state of the market.
Fretting over the real estate market on a daily, monthly or even annual basis, like the bears do is just silly.
Joe Q.
at 3:00 pm
Fretting over the real estate market on a daily, monthly or even annual basis, like the bears do is just silly.
I would agree that constantly watching the value of particular houses (or your own house) is silly. Both bears and bulls do this. However, I don’t think it’s silly to “fret” over the real estate market in general, given how closely Canadians’ personal finances (savings, retirement, debt) are tied to it, and how much economic activity is associated with the RE industry. Otherwise, why are the government, BoC, bank economists, etc. all keeping such a close eye on it?
Long Time Realtor
at 4:35 pm
Bears like you, seem to live in constant fear.
Despite your claims to the contrary, you are obviously not a homeowner. I think you are a sock puppet who also goes by various other internet monikers like: “Canadian Watchdog” / “Greg” / “RE Charts”
Time to fess up pal.
jeff316
at 7:02 pm
I’m pretty sure he is a homeowner.
And Joe’s definitely not a sock puppet.
Why bother stooping to this level? It’s pretty much rendered your original post completely meaningless.
Long Time Realtor
at 9:24 pm
What’s your point?
jeff316
at 2:56 pm
I expected that after your original post, you probably had more to say. But it seems like that’s all you had.
Paully
at 11:59 am
Your first point was well written and a valid argument. Your subsequent ad hominem attack does nothing to improve your original point. It only devalues it.
Long Time Realtor
at 1:05 pm
You must be another angry renter.
Geoff
at 5:13 pm
I’m a long-term homeowner and Long-Term Realtor, it’s comments like yours that attempt to poison this blog. I don’t understand why discussions like this have to shaped in a ‘renters are poor losers’ or ‘homeowners are debt ladden ignoramuses’ viewpoints. It’s just math. It’s just always been math. If you can afford to buy a home and are willing to accept a certain probability range of events (say a job loss, or a divorce) then do so. If you would prefer to rent as you believe that math is what will lead to financial success, then do so. It’s just math and probability and self-risk assessment. I will say it’s unusual for a homeowner to spend 5 years in their first home, at least that’s been my experience among my peer group (I’m 39, and on my second property, hardly unusual – and while we’d like to move, it’s unlikely we will because the moveup costs are too high).
In your first example by the way, your loss was not on paper. It was real. A loss on paper means a loss that isn’t realized, like if you own a stock that goes down $20 the day after you bought it. Assuming you don’t sell, you have only lost that $20 “on paper” and the stock could recover tommorow. In your example, you did sell, meaning you realized that loss, and thus it wasn’t on paper. What you actually meant was that you paid down the mortgage as a forced saving plan. You could also save money while renting, as it’s pretty self-evident that renting is less than the cost of owning in most economic periods, including this one (otherwise all landlords would be losing money all the time). It’s concerning that you’d offer financial advice if you’d do such a poor job explaining simple finances.
Geoff
at 11:25 am
I don’t believe in timing the market. I believe in timing yourself. In 2007 my wife and I bought a house we both loved in an area we both loved that cost about 3.5X our income at the time. Not becasue it was on sale, or a screaming deal. Because she was 9.2 months pregnant and my one-room loft wasn’t going to cut it.
Had it been today, I believe we’d likely rent rather than own, though that would be a tough tough conversation. I don’t believe the mantra of ‘renting is throwing your money away’ is anymore true though than ‘house prices are too much. There will definitely be a crash, and it will happen on March 13th, 2015 at 8:01EST” either. I believe in making the best decisions for yourself you can based on the information you have available to yourself at the time.
Potato
at 2:53 pm
One of the big areas where people unintentionally time the RE market is in buying preconstruction — especially if they already have a place that they plan to sell when the new one is ready. They often commit to holding twice as much RE as they mean to for a period of several years. If there is a correction in the meantime they could face big losses due to the leverage.
And of course there’s an important difference between timing the market for stocks and for real estate: there isn’t a parallel for renting. The time scales are also vastly different. If you decided to get out of the US housing market in 2004 by “selling with a long close” it did you no good. Trying to sell and re-buy within two years did you no good anywhere from 2004-2008, even though you would have been correct in determining the market was over-valued. Trying to time the market that finely is a fool’s errand. But even being a few years early there you would have done very well for yourself by selling and renting — you just had to go into it with the knowledge that the timing was hard. You could have got a 10-year lease and not bought until today and come out ahead there if you had the valuation even approximately right, even with some rebound off the bottom the past few years.
The valuation I think is the key part, and there your friend in 2005 made a blunder: prices just weren’t that over-heated back then on any metric to expect a 50% crash. But then from 2005-2008 prices went up ~7%/yr without an improvement in the fundamentals, and then interest rates dropped and prices rocketed even higher; at some point along there I think (and did think) you could reasonably have expected some kind of correction.
Kyle
at 3:44 pm
@ Joe Q
Toronto used to have their 2011 household vs dwelling data published, but it looks like it’s been removed….maybe Ford thought it was gravy. Anyhow from what i recall that data would indicate that rising ownership rates were driven mainly because of a rise in the number of households (namely single person households).
Josh Vermet
at 8:42 pm
Sell.
GF
at 7:40 am
I don’t think you can really time but you can have a general idea of where things are standing right now and adjust accordingly. If we were in a dip, I’d be much more inclined to reach a little bit and buy something for slightly more, anticipating growth later on. Since we have been on an upswing for so long I would feel much more comfortable going mid-range vs “luxury” for the house purchase. That way if there is a dip you don’t lose as much. My wife and I have talked many times and both agree that if there was a large correction, we would sell what we currently own at a loss and go bigger while we could.
I’m in the generation where people haven’t seen a correction in their adult lives and it’s difficult to be a person who says that one will come eventually. Too many people just don’t think it will happen and also think real estate is the best investment out there, S&P be damned.
nancie
at 7:58 am
Rob Ford must have been up to something Thursday when you didn’t receive any comments …stiff competition! I am becoming a big fan, of your blog not Rob Ford…..finally someone who talks about the realities of real estate in an engaging and grammatically correct fashion! Keep up the good work!
frank le skank
at 10:19 am
When it comes to a real estate you don’t need every homeowner to sell at a loss to decrease the median/average price of RE. It only takes a small portion of homeowners, who are overextended and forced to sell, to instigate a decrease in prices. I think that the prolonged stagnation of incomes in the city of Toronto does not support real estates current values. Is that the only variable that matters? No, of course not, but no one can deny that its one of the most important factors. I want to be a homeowner and the bank wants to let me, but when I sit down and do some basic addition and subtraction it really makes no sense at current levels. So, I will either wait for prices to come down to reasonable levels or rent and save. You can label that as timing the market, being over bearish, a missed opportunity, smart, stupid…. I’m not fooled by the “buy now or be priced out forever” scare tactic and I’m not trying to keep up with the Jones. Its financial planning and it aligns with my goal to retire with sufficient savings. Don’t get me wrong I would prefer to own, but I won’t do it at the expense of my families financial well-being.
Paully
at 12:02 pm
Well said Frank. I’m with you 100% on that comment.
Victor
at 2:59 pm
Agreed Frank; well stated.
Schmidtz
at 1:41 pm
One way to look at it – just work your ass off and make a lot of money, thereby reducing the effect of either timing the market, or ignoring timing completely.
Cash flow trumps everything people.
Victor
at 2:54 pm
“I suppose you could buy a REIT, or buy a basket of properties – houses, condos, muliplexes – all across the GTA. But the average person can’t do that.”
Agreed that many people are financially illiterate but let’s be frank, with a tiny bit of education, an average person should be able to go to their bank, set up an online brokerage account, and then buy shares in an ETF for REITS (eg: XRE), and similarly ETFs for bonds, preferred shares and equities. It really can be simple…alas most people only keep their money in GICs…such a waste.
TurnerNation
at 9:35 am
Comparing a risky has-been tech stock with an entire index (S&P) of 500 of the most successful companies in the world? And bad ones get dropped and replaced with good ones. That one ain’t going to zero. Quite the opposite.
Long Time Realtor
at 10:03 pm
I get such a kick out of listening to all the bears come on here acknowledging that it is impossible to time the market; and then proceed to explain how and why they’re going to do it anyway. Hilarious.
grasshopper
at 10:29 am
With regards to your videos, they are great. However…please please please stop with the cheezy sound effects. The content is enough without all the (actual) bells and whistles which are distracting and juvenile.
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at 9:06 pm
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