How to market-time your retirement portfolio

  • By Dana Anspach,
  • MarketWatch
  • Investing Strategies
  • Saving for Retirement
  • Investing Strategies
  • Saving for Retirement
  • Investing Strategies
  • Saving for Retirement
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In the "Back to the Future" movie series, the character Biff knows how valuable The Grays Sports Almanac is to his past self. "You see this book? This book tells the future. Tells the results of every major sports event till the end of this century," he tells his younger self.

His younger self is, naturally, skeptical.

The entertainment industry runs wild with dreams of receiving a magic copy of tomorrow's newspaper, or next year's sporting event winners. Our imagination runs wild too. It's fun to think about all the things we'd do with the money we'd make by knowing the future, even if just for one day. Then we shake it off, knowing it is impossible.

Somehow, this grounded sense of reality disappears when it comes to investment decisions. Instead of maintaining clarity about the impossibility of knowing the future, we begin to act as if we have next year's paper.

Many who invested in bitcoin got caught in this "back to the future" cycle. They were certain it would continue to climb. It didn't.

With stock market volatility on the rise, many are just as certain about the "inevitable recession" or "impending market correction." Recently, one question came in from a young man asking if he should take his emergency fund and invest it in stocks when the market correction happens. That would work well, if you had next year's paper. But how will you know when the market has hit the bottom and if it is the right time to put money in? In hindsight, it's easy to see on a chart. In the here-and-now, it's impossible.

Questions also pour in from those a few years from retirement, wondering what they can do about their 401(k) and IRA money to protect it from losses. It's a great question to ask, as you need to rely on these funds for the rest of your life.

To answer this question, you must separate out the emotional component of the question from the logical one.

First the emotional component. What you really want to know is "How can I make sure I will be OK financially no matter what economic or market conditions come along?" When you start asking yourself this kind of question, that gets at the heart of your concern, a better set of solutions show up.

Next, the logical part. When you focus on a narrow question, such as discussing the inevitable recession or impending market correction, the answers that arise are often ones that can be dangerous to your financial well-being. Why? Because you are talking about these things as if you know the future. As if you have a copy of tomorrow's paper. You may know that something will happen again one day, like a recession, but that is far different from knowing when it will begin or how long it will last.

To time the market, you must know when the market has peaked so you can exit at the top, and when it hits bottom, so you can get back in. That's like predicting the World Series winner twice in a row. Would you bet your retirement money on your ability to do that?

Once you've asked the right question, you must come up with a solution -- and it should not require tomorrow's paper to work.

  • One approach to protecting your retirement money is to put it all in safe investments. Now you are foregoing the potential for higher returns. That might work fine, but it could also deliver a far worse outcome than continuing with a long-term plan.
  • Another approach is to try to time the market , moving money out at what you think is the peak, and waiting until what you think is the trough to put it back in. Does that require knowledge of the future to get it right? Sure does. Not a good solution.
  • A third option is to think in terms of time segments. What part of your retirement money will you need in which years? If you're three years from retirement and you'll need to withdraw $50,000 a year, perhaps you move five years' worth of withdrawals, or $250,0000, into safe investments. Now that portion is insulated from the ups and downs, and the remainder continues to have the potential to capture equity returns.

With option three, you are timing the market in a sense. You're timing your retirement portfolio (https:// www.sensiblemoney.com/learn/how-to-build-a-retirement-portfolio/) to your needs. You're making a thoughtful decision that only the portion of your portfolio that you won't need to tap in the next eight years will be subject to market risk.

Is there any magic to eight years? No. That number is used only as an example. It could be 10 years, five years, or 12 years' worth of withdrawals that remains invested safely. When you make a plan that shows how much you'll need to take out in which years, it becomes easier to calculate out the specific amount to keep safe.

So which kind of market timing do you want to use? The kind that requires you to know the future, or the kind that helps you align your investments to the point in time when you'll use them?

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