After the recent strong stock market gains, I have been asked a few times lately: “What should we do to protect against a possible market downturn? Should we become defensive?”

If you could move in and out of the market at the right time, you would obviously increase your returns and avoid some losses. On the other hand, many of the best investors, such as Warren Buffett, tend to stay invested all the time. What is the most effective strategy?

Let’s look at timing the market and how we could do it.  The most important part of timing the market is to get the general direction right. There are all kinds of predictions, but to keep it simple, let’s categorize your prediction for the next year into one of the four in the chart.

Table 1: S&P500 since 1950. Source: Standard & Poor’s

What’s your prediction for the next year?

If you are predicting an “up a lot” or “up a little” year, you would want to be fully invested. That means you need to be fully invested at least 3 years out of 4. The biggest risk of market timing is missing the 76% of years that are gains.

Most years, you would probably predict a “normal” year – right? Note that “normal” returns are abnormal! On January 1 each year, the media publishes predictions by many financial experts. Most predictions are in the normal range. Since the stock markets average a bit over 10% long term, you would expect most years to be somewhere between 0% and 20%. However, more than 60% of years are abnormal.

If you are predicting a “down a little” year, it is probably not worth changing your investments. The issue is that what if you are wrong? The human gut is almost always wrong when it comes to investing. And remember there are three times as many gains.

How much would you gain anyway if you are right? Remember, you would have to be right both in the timing of selling and buying, and you may incur some costs and tax consequences to make changes. The “up a little” and “down a little” years could also easily have turned out differently in a couple months at year-end.  Unless you are very sure of a down year and you know you have your human gut in check, it is rarely worth it to try to avoid a “down a little” year.

Predicting bear markets

Where market timing could make a big difference is if you could avoid the “down a lot” years, or the bear markets. If you could be fully invested all the time, except just avoid the bear markets, you would outperform significantly.

How do you see a bear market coming?

The first thing to remember: “Bad news doesn’t hit you between the eyes. It hits you in the back of the head.”2 Most predictions of bear markets happen when there is well-publicized bad news expected. For example, recently we had fears of a collapse of the European Union and U.S. debt fears. Bear markets almost never result from anything well publicized ahead of time. Can you think of any time in history when bad news was widely predicted, then actually happened and after that the market falls?

Probably the only way to predict a bear market is to see a market bubble. The issue here is that true bubbles are rarely identified as bubbles. Hardly anyone thought energy was a bubble in 1980 or technology in 1999. Both times, everyone thought “this time it’s different”. The internet was going to change the world. Remember “The New Economy” and “clicks, not bricks”?

Bubbles are really about extreme overvaluation. The mood is usually euphoric with many people predicting continued large gains.

There are issues with predicting bear markets, though. First, remember that there have been only 3 “down a lot” years in the last 63 years1, which averages to one every second decade. If you are predicting them more often than that, it is probably your Stone Age human gut creating false fear. Many people predicted another bear market after 2008, but few predicted one before. The people that correctly predict bear markets are often the “permabears” that are always pessimistic.

I know 3 people that correctly predicted the 2008 crash and moved all their investments to cash before the drop. Great for them, right? The problem is that, last I heard, all 3 are still in cash today. Being permanently pessimistic is a disaster, since it means you will miss the 76% of years with gains1.

Second, if you correctly predict a bear market, you need to get invested again quickly. All three “down a lot” years where followed immediately by one or two “up a lot” years. Predicting the bear market is useless unless you buy in lower than you sold!

Third, make sure you know something few investors know. If you are only responding to scary news articles about well-publicized fears, the market has probably already accounted for them in its current price.

The last 2 bear markets show some of the issues. Each one is different. The market was not overvalued before the 2008 bear market, which is part of why few predicted it. In retrospect, the technology bubble was a clear overvaluation and bubble that could have been identified ahead of time. The issue is that the market was already overvalued in 1997. If you sold then, you missed the 3 big gains from 1997-1999 before you correctly avoided one big loss.

The reason predicting a bear market is so challenging is that if you miss even one of the “up a lot” years, you will probably underperform long term.

Today, many people are skeptical of recent market gains, and are expecting a downturn soon. However, there is no sign of euphoria or overvaluation. The market P/E is about 143, which is below the long term average. What’s more is that we just had a bear market. Remember that we should only expect one about every two decades. I believe that the skepticism today is mostly Stone Age human guts overreacting to fear and still remembering the pain of the recent crash in 2008.

Buy and hold investing

The difficulty in correctly predicting a bear market, getting the timing right, and not missing out on all the up years, is why, in general, it is best to be a “buy and hold” investor. The key to successful stock market investing is to be fully invested during the 76% of years that are gains.

The stock market has very reliably produced large gains long term. If you invested $1,000 in 1950, you would have $749,330 today1. “Buy and hold” investors can get the long term gains of the stock market. Market timers are far more likely to get lower returns.

Predicting bull markets

Should we give up on market timing altogether? From my experience, there is one type of market prediction I have been able to do successfully – predicting an “up a lot” year after a bear market. Markets have historically almost always bounced back quickly. The 3 bear markets since 1950 were all followed immediately by one or two “up a lot” years. The 27% drop in 1974 was followed by a 72% gain in 1975-76, the 22% drop in 2002 was followed by an 82% gain in 2003-7, and the 37% drop in 2008 has been followed by a 73% gain in 2009-20121 (which may be larger after 2013).

These predictions require no great insight on my part – only the assumption that the market will always recover.
In my opinion, the best investment strategy is to be a buy and hold investor (to be fully invested) all the time. Then once every decade or two, there will be a big sale – an opportunity to invest more at a discount of more than 20%. Taking advantage of every bear market is an easy way to beat the market.

My prediction for 2013

I don’t usually make short term predictions, but I do always have opinions. Certainly one of the most reliable indicators is that the popular sentiment is usually wrong, since it is already priced in. Most financial experts and most amateur investors today are predicting either a “normal” year or another downturn. Therefore, those two scenarios are unlikely.

We are starting year five of this bull market, but we have not yet had the normal gain from the last market peak. Sir John Templeton’s quote explains a lot: “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” The mood I see from investors today is skepticism, which is why my opinion is that we are only on second base in this bull market.

Considering that the market is very cheap (especially compared to bonds), sentiment is overly skeptical and the markets have not yet had their normal gain in the last 6 years, in my opinion the most likely scenario for 2013 is an “up a lot” year.

1 Standard & Poor’s
2 Oscar Belaiche
3 Wall Street Journal. S&P500 forward P/E:

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website  You can read his other articles here.

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You don’t need a whole guessing game (that’s been proven repeatedly to not work) to time the market. A proper buy and hold strategy includes three things:
– regular contributions/dollar cost averaging
– an asset mix that includes classes that are not equities
– occassional rebalancing.

If that’s all you do, then you are *guaranteed* to time the market. When equities are high, you sell and move out every time you rebalance. When equities are low, you’re buying more with your regular contributions, and rebalancing puts more into equites which is again buying low.

The only thing that ‘timing the markets’ provides is excitement and emotion. And that excitement comes at the cost of substantial long term costs to your investments.

Here’s an example of what’s wrong with this article:
“Remember that we should only expect one about every two decades.”
A basic knowledge of statistics shows that is completely misleading. the article is suggesting that it’ll be another 20 years before the market drops again, and therefore we’re safe to predict upward drift right now. That’s hooey. The market is a random walk with upward drift, and that means that a crash tomorrow is equally as likely as a crash in 20 years. The fact that a crash happened yesterday does not predict an upward market tomorrow, which is what the article incorrectly suggests.

What to when markets have performed poorly?

I wouldn’t necessarily agree with first sentence. Sure the American markets have been strong, but the TSX has not gained substantially.

I would support LIC’s proposal that rebalancing when assets fall out of your targeted allocations, that you can move money in or out. Note this IS market timing, but based on presumed changed in the underlying valuations of the assets.

Of course rebalancing is market timing. But it’s market timing based on the stock market’s current value against other asset classes. If the stock market is down in relation to other asset classes as of right now, you buy. If it’s up in relation to other asset classes as of right now, you sell. You’re market timing based on the past performance of the stock market.

By contrast, the article’s version of market timing is based on your predictions for the stock market in the future. If you’re going to do that, you might as well just use your horoscope to direct your investments.

So rebalancing is market timing, but certainly not in the sense that you’re predicting anything.

I’m just going to sit this one out and watch the show. ;)


Stock prices (especially the US S&P) have far out-paced the organic growth of net revenue from operations in the composite businesses. That suggests that the market may have gotten ahead of itself.

I do not see the business income from net operations growth catching up to price growth in the next few years.

A valid question is why did the prices soar? If businesses were underpriced, then this is a price correction for sure and should be stable and could rise further. If prices soared because of expectations that net revenue from operations is going to catch up then prices will have difficultly gaining significantly until that revenue growth materializes.

What is the fair value pricing for current operating net revenue?
What is the expectation for operating net revenue growth going forward?

To play devil’s advocate, I would recommend reading Mebane Faber’s white paper, Global Tactical Asset Allocation (available free on SSRN, just google it).

Ed may be right that using gut or intuition is not a good way to try to time the market. Faber suggests using a simple, mechanical timing system where you buy each component of your portfolio when its total return is above the 10 month (roughly 200 day) moving average of the total return series (ie, including distribution). When it is below, you sell and hold cash instead. His research indicates that there risk reduction in terms of reducing drawdowns and volatility.

you and me both SST ;)

I’m a buy and hold dividend investor, so look forward with perverse delight to bear markets. I’ve been letting dividends and contributions pile up for close to a year now, and am getting itchy to put some money down. If I put it all down now, I’ll come very close to being able to passively cover my housing costs. If I wait, I may lose the opportunity, or I may be able to cover the cable bill, too.

I need to get a better crystal ball.

At any rate, I’m glad I didn’t buy four weeks ago.

I will not sell all my portfolio that I built over the years just because markets are going down or market are at all time high level. how market indicators are performing might be different from stocks in my portfolio.

I prefer to sell OTM (out of the money) calls and buy ITM (in the money) puts.

Came here for Ed’s critics comments…
Left unsatisfied…


The point of this article is to show how difficult market timing can be. In fact, gut-based or intuition-based market is usually wrong.

From 2009 until now, I have talked regularly with people predicting another market crash. This despite 2 major reasons another crash would be very unlikely:

1. Crashes are rare. There are almost 8 “up a lot” years for every “down a lot” year.
2. “Up a lot” years are the norm following “down a lot” years”.

These predictions of another crash are fear talking and exactly the reason market timers tend to underperform.

I’m not saying that we can assume it will be 20 years until the next bear market. However it is just as likely to be 30 years than 10. My point is that if you are predicting a large loss year after year, you are almost definitely wrong.

I agree with you that rebalancing is a good discipline. It is also an illustration that successful market timing would almost definitely involve selling high and buying low. This is counterintuitive to all the predictions I have been hearing, which amount to selling low.

The market is not a random walk, though. Jeremy Siegel proved that the standard deviation of stocks falls far faster over time than you would expect with a random walk. For example, the standard deviation of stocks is a bit over double that of bonds for 1-year periods, but is lower than bonds for 20-year periods or longer.

This mean reversion to the long term upward trend (roughly 7% over inflation per year) is quite reliable over time – big downs are almost always immediately followed by big ups.

The 3 losses of more than 20% in the S&P500 since 1950 all had a large gain the next year. Here they are:

– First was 1974 with a loss of 27%. It was followed by a 38% gain in 1975 and a 24% gain in 1976.
– Second was 2002 with a loss of 22%. It was followed by a 29% gain in 2003.
– Third was 2008 with a loss of 37%. It was followed by a 27% gain in 2003.

In short, assuming a large gain right after a large loss is a good bet – and possibly the only easy market timing move we all can make (other than the discipline of rebalancing).


Hi Steve,

What net revenue figures are you referring to and from when? Earnings have actually risen faster than the S&P500 since just after or just before the financial crisis.

The figures from early 2009 are extreme because earnings collapsed temporarily, but it is back up and quite a bit higher than before the crisis.

That’s probably the main reason why the stock markets are “soared”.


Hi Andrew,

Market timing based on moving averages is interesting, but my reading on it is unfavourable. It amounts to trend-following, which can reduce returns by buying high and selling low.

The studies I’ve seen on it show that it worked in 1929, but has mostly not worked since then. Especially since 1990, it has not worked. The DOW averaged 11.76%/year from 1990-2006, but the 200-day moving average strategy would have only averaged 6.6%.

The results vary depending on which market and which time period you take. My view is that it reduces returns and risk by reducing the large gains and losses. It misses some of the biggest gains because they are usually right after the biggest losses.

You might end up with lower risk-adjusted returns, but I think you should expect lower actual returns.


Hi LoonieLover,

Nice going. Why do you accumulate your dividends, though? Don’t you think you would be better off always reinvesting your dividends immediately? Why do you think that market timing will help you?


Hi Jin,

Your options strategy reduces your market exposure at or near the bottom of the market, which means you would miss any rebound.

You are essentially making a bet that the market fall will continue, instead of betting on a recovery. The recovery has historically been far more likely.

Based on market history, I would suggest not to do strategies that limit your upside after a large market decline.


Good one Ed, I’ve always looked to statistics much like these and came to the same conclusion. Just a couple of weeks ago TD messed up an account transfer and I lost 1-2% of the portfolio by being out of the market for a few days. I have no illusions that it will keep going up forever, I know it will only go until investor sentiment reverses itself and we never know when that point will be.

I think a lot of people today are calling the point of maximum euphoria just because the doom stories have been toned down a bit. I’m sure more small investors are being drawn in by the recent gains but we’re not still not seeing them bite hard. Maybe they’re too scared to come back in force for the next decade. Whether they do or don’t a lot of predictions will turn out to be wrong!

One thing is safe to say… I’m very pleased with every big drop in the market. I really hope we don’t have to wait 16 more years.

Ed, if you’re curious, I suggest reading the white paper I mentioned. It’s about a 30 minute read. I don’t think it’s fair to say that things suddenly changed around 1990 and trendfollowing stopped working. Trendfollowing will tend to underperform bull markets and outperform bears. So if you cherrypick a bull market, the best a trendfollowing strategy can hope to do is match market returns. If you look peak to peak or trough to trough, the story is usually different. Compare 2003 – 2009, or 2000 – 2008.

Hi Ed,

The P/E 10 (Schiller P/E) is well above the historical trendline suggesting over priced territory.

Even this may be overly optimistic. The earnings data in P/E10 are unfortunately net earnings, and not revenue from continuing operations (organic growth) which is far more important for real long-term growth and dividend growth. I believe much of the net earnings growth since 2010 has come from inorganic M&A, and refinancing of debt at record low corporate rates.

For the companies I track, the growth in revenue from continuing operations has not kept up with price growth.

To Ed Rempel,

let me explain a little bit more my strategy.
First: I would not link my portfolio to the market indicator itself. I might have a very conservative portfolio or a very volatile one. if market goes up or down 10% and my portfolio or stocks are just varying 5-6% I am not too concern.

I use technical indicators as SMA 50, SMA 200, RSI for the stock itself and if my analysis indicates that the stock grew too fast and is loosing some momentum then I sell OTM (out of the money) call options and/or buy ITM (in the money) put options.

if the stocks runs out of steam i can cash in my puts.
if the stocks continues to run higher then the call options will be exercised and I will sell the stocks for a higher price and cash in the option premium

I have 5-10% of my portfolio ready to use for this ‘actions’. I am using options only to protect my capital, I know I am not going to hit a home run with it.

Hi Value,

Thanks for your comments.I agree. People are thinking we are at a market top, but there is no evidence at all of any euphoria – in fact the opposite.

I recently read a study that I’m trying to find. Just a few weeks ago when the S&P500 broke its all-time high, the optimistic sentiment dropped from 35% of investors to only 10%. That means 90% are pessimistic – clearly a strong bullish sign.

I follow what most investors are doing as a negative indicator. Mutual funds and ETF purchases are focusing on bond, balanced, income and dividend funds very heavily, so those categories will all likely underperform. The blogging community is also heavily dividend-focused. These are all generally the expensive areas now.

Whatever the bulk of mutual fund, ETF and financial bloggers are doing, it is usually best to invest elsewhere. This plus the overly pessimistic sentiment are all very bullish indicators for equities.

I’ve been thinking a lot about the overwhelming pessimistic sentiment. I worry for the future of most Canadians. I read an article that we have a generation that does not know that the stock market goes up over time. They think it goes up and down in a parallel band. This is because the S&P500 peaked in the 1500s in 2000, 2007 and now is there again. That is why sentiment turned negative.

However, those times were very different. In 2000, the market was highly overvalued at the peak of the tech bubble. In 2007, it was approximately fairly valued and today it is quite cheap – especially compared to other periods with low interest rates and compared to bonds.

What I wonder about is how much will the market need to rise before the sentiment becomes optimistic, never mind euphoric?

I also look forward to big market drops (except that I know it is hard on our clients). It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down or become more aggressive in some way and take advantage of the inevitable recovery.


Hi Ed,
Excellent question, with a stomach-churning answer. Long story short, my income is not particularly reliable. About a year ago, we were told that our hours may be reduced or even eliminated. I would love to be able to live on what I make and re-invest the rest every month, but I don’t know if or when I’m going to go through periods of under- or un-employment. Knowing that I may need to withdraw that money at a bad time, it makes it difficult to expose myself to short-term market risk.
Of course, if I can swallow hard, invest the cash I have, and cover my housing expenses, that would give me some room to manoeuvre that I don’t currently have.
I guess the crux of it is, I’ve had market timing thrust upon me (sort of). At a certain point, if markets keep falling, I’ll probably jump in a little deeper. In a perverse way, my job instability may end up benefitting me.

The article and the comments are completely filled with the single biggest and most pervasive problem in the equity industry. People try and logic their way through stuff using studies and stuff that ‘just makes sense’. They string together a bunch of stuff and then say “well obviously, then this next step is true”. Unfortunately, without exception, drawing that last conclusion has been shown to be completely random. You can read this article and draw conclusions. Or you can have a monkey fling poop at a wall and draw conclusions from that. Both have equal chances of success. And both have equal chances of failure. THAT”S been shown to be true repeatedly. The only difference between the monkey and the average investor is that you’d like to believe your skill level is somehow above the monkey. It’s not.

Let me repeat three full paragraphs from above. The paragraphs start with stuff that just kind of sounds like it makes sense. And all three end up with completely unproven conclusions. Reread them and see if you don’t agree:
“I recently read a study that I’m trying to find. Just a few weeks ago when the S&P500 broke its all-time high, the optimistic sentiment dropped from 35% of investors to only 10%. That means 90% are pessimistic – clearly a strong bullish sign.

I follow what most investors are doing as a negative indicator. Mutual funds and ETF purchases are focusing on bond, balanced, income and dividend funds very heavily, so those categories will all likely underperform. The blogging community is also heavily dividend-focused. These are all generally the expensive areas now.

Whatever the bulk of mutual fund, ETF and financial bloggers are doing, it is usually best to invest elsewhere. This plus the overly pessimistic sentiment are all very bullish indicators for equities”
Be clear – it’s been shown that over long periods of time, indexes will outperform market timers 97% of the time. SImply do nothing and you’ll have better results than 97% of the market timers.

Or, to look at it from the other way, try and be a market timer, and 97% of the time you’ll have lower results in the long term than those that simply park and sit in index funds.

I respect Ed’s knowledge and research on many subjects and I appreciate that he’s looking for the best for people – but this article is entirely misguided.

I enjoy Eds postings because of the turmoil it causes! Keep the debates going!

“It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down…” — Ed

Ed, how is it possible to be “fully invested” and still have cash to “double down”?

Astounding “logic” typical of financial industry “professionals”.

Disclaimer: I am NOT

Assuming this is an accurate quote…

“It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down…” — Ed

it reminds me of a co-worker (engineering degree, MBA) who told me he had a guaranteed way to win at the casino. I told him without even hearing his idea, he was wrong. Here was his ‘guaranteed’ way to beat the casino.

– go place a bet at roulette on one of the red/black or even/odd type bets.
– every time you loose, just double down on your next bet. It shouldn’t take too long for you to guess right again and that way you cover all previous losses.
– leave the casino after a win and you’re satisfied with your winnings.

Important tips from my co-worker to ensure you win:
1) whatever you choose to bet on, e.g. red, stick with it. Don’t switch to black.
– anybody with even a modest understanding of probability understands it doesn’t matter whether you stick with red or keep switching, your chance of winning on each spin doesn’t change.

2) Only quit after a win.
– yeah….about that….

Hi Andrew,

I read the white paper you mentioned. She advocates the strategy not as way to improve returns, but as a way to reduce volatility and get similar returns.

It is mostly similar to some other studies I’ve read on tactical asset allocation using moving averages. I agree with you that it tends to lag in bull markets and outperform in bear markets (mainly the big ones), which is what you would expect being out of the market quite a bit of the time.

Interestingly, it does well in a 1900-2009 period, which is very long, but this is almost entirely because of missing much of the 1929-32 crash. From 1933 to 2000, it lags significantly, which is also a long time.

For some reason, she has chosen 1972-08, which is somewhat unfair because it starts and ends with a bear market.

It is somewhat interesting, but from my perspective, only as a risk reduction strategy. If you can stomach the volatility, then you can avoid trading in and out of each of your positions many times and get similar returns.

I generally have more confidence in value style investing, rather than momentum or trend-following investing such as this. It would be interesting to see a study, but I believe that being fully invested all the time and then doubling down in some way any time the market declines by more than 20% would likely give you a significantly higher return.


Hi Steve,

I don’t find the P/E 10 (or Shiller P/E) to be very helpful. It averages the P/E over the last 10 years. It’s somewhat like averaging the price of your house over the last 10 years. The final number can be very far from today’s reality.

It is useful for knowing when we have been in the doldrums for a long time, but does not reflect today’s P/E.

The stock market P/E has been dropping steadily since the peak in 2000 at the top of the tech bubble. It also spiked in 2008 when earnings collapsed temporarily during the crisis.

But looking at today’s P/E of about 14, the market is relatively cheap.

I have not heard anything about extraordinary gains from M&A inflating profits. I don’t have the facts here, but all the comments I’ve heard say the higher profits are mostly from higher gross margins. Companies have been able to keep some costs low, such as interest and salaries & wages.

There has been some speculation whether the high gross margins are sustainable if interest rates rise or when unemployment is lower. I have also heard from quite a few fund managers that the balance sheets of companies are the strongest they have been in decades, as they have reduced debt and built up cash.

Perhaps you should track different companies? :)

Do you have anything that verifies what you are saying other than the companies you track? That is interesting. I’ll see what I can find on this.


Hi Jin,

How long have you been doing your strategy? I believe you would find over time that it would lag a buy & hold strategy.

Essentially, you are trying to time the market by capping gains under the assumption that if a stock starts declining by a certain amount, it will keep declining – or at least will not rebound or rise sharply. You may or may not avoid some declines from this, but you will miss out on any “10-baggers”.

Here is the point that I think is important. In the short run, stocks are not “serially correlated”. That means you cannot predict the short run future move of a stock by looking at the recent past movements.

The stone age human gut tells people that a trend will continue, but it is just as likely to reverse.

This is the same reason that using stop losses tends to reduce returns. (I call them “take loss orders”, not “stop loss orders”. :) ) You could set a stop loss at 10% below the current price to try to limit your declines, which would be similar to your strategy of using options to sell after a 10% move.

The question is: Why would you want to automatically sell your stock if it falls by 10%? If you believe in the stock and it falls by 10%, wouldn’t you want to buy more since it is now a better value? In addition, wouldn’t you want to know why it fell? Did something happen that will impair the future value of the company or is this a random market movement based on some macro event?

What I can tell you is that if I heard a fund manager was using that strategy, I would not invest with him.


Ed, Faber breaks down the returns by decade as well, and I don’t think your assertion that the outperformance only occurred during the 1929 crash is accurate.

He used 1972 onwards because there are better data series available starting at that point. He also recently updated his paper with 2012 data, but has not yet published.

While it can be used for risk reduction, there are ways to increase the risk to be again comparable to the volatility of a 60/40 portfolio while producing returns that are superior to that strategy.

On CAPE/ PE10, I think you’re incorrect again, Ed. TTM P/Es have next to no predictive value, whereas CAPE has well documented predictive power for long term equity returns due to mean reversion. Using 20% drawdown as a trigger for buying does not mean you will be buying when the market is cheap. You might just be buying a 20% drawdown just before it becomes a 60 – 80% drawdown. Check out this:

Hi LoonieLover,

Interesting. Why do you think it may benefit you? Wouldn’t the times when your income is lower possibly coincide with times when the stock market is lower? That could mean that you miss the buying opportunities.

Would it work to cover your personal cash flow issues with a line of credit, so that you do not have to market time your investments? My guess is that the market timing would more likely lose money for you over time.



I hope I’m not giving the impression that timing the market is the way to go. The article was supposed to show how difficult it is to time the market.

Let me be clear. I’m definitely firmly a believe in buy & hold. I believe the stock market will produce a good return long term. In order for my clients to make the retirement goals, I want to make sure we get all of those returns (and hopefully more).

The only market timing that I have found to work is to take advantage of big market downturns. Any time the market is down 20% or more, historically there has almost always been a large gain soon after that, so we look for ways to take advantage of it.

We would try to make several years new contributions, look for more money to invest, perhaps add an investment loan, or just invest more aggressively after any 20% or more market decline (assuming it makes sense for the client).

I am a believer in buy & hold, but I always have opinions on what is likely to happen. I don’t use those opinions to time the market, though.

The way I use my market opinions are not for market timing, but for:

1. Evaluating fund managers. If a fund manager is getting defensive at the bottom of the market, for example, I will be much less likely to consider that fund manager to be an All Star Fund Manager.
2. Avoiding funds in the popular trends. In the last few years, every other week a fund company announces a new income or dividend fund. I think this is too popular of a trend, so we have not used any of these new funds.
3. Staying disciplined to avoid getting carried away. Try to avoid anyone cashing in after a large decline, for example. Also, if a fund has awesome stats for 1,3,5 and 10 year periods, then perhaps the style of that fund manager is too much in favour, so we should not get too overweight with him.

In short, my market opinion is only a way to help evaluate fund managers and to try to stay disciplined. I don’t use it to time the market (except after 20% declines).


Hey PJ.

Glad you’re enjoying the show!


Hi Ed,

With regards to your request for information regarding the revenue from continuing operations, to my knowledge there is no readily available, credible source that compiles this en masse for the S&P and publishes. Net earnings for sure, but not cash from continuing operations. This means it must be done manually which is only worthwhile for companies you are investigating.

I am not saying I’m right or wrong, I’m just raising the consideration that cash from continuing operations in the recent past (say since the economy stabilized in 2009) may not have kept up with prices. I am proposing that cash from continuing operations is one of the most important indicators of organic growth.

Despite the fact that I tend to disagree with nearly everything in all of Ed’s articles, I admire that you keep coming back day after day in the comments to defend and explain your position, many do not.

I think I always have different views because Ed seems to be an asset investor, with a focus on equities. I am a business investor, I invest by taking partial ownership of businesses.

Hi again Ed,

Re-reading my post, I guess I wasn’t as clear as I should have been.

First, my work had been steady and predictable until about a year ago – a little longer now, I guess. Until then, yes, I invested pretty regularly (not to the extent of DRIPs or anything, but every 6-8 weeks or so, usually). When word came that things were going to change at work, I decided to stockpile a little money in case I needed it. We already had a line of credit set up to use if needed, but I really hate borrowing money if I don’t absolutely have to, which is why decided to let the cash pile up.

Second, in the past, events have conspired such that I was able to profit from what one might call market timing. One might also call it getting lucky. Back in 2008, when I was ready to buy into the stock market for the first time, I had to get my money out of an (unlisted) MIC first, and that process took three months. It was during those three months that the bottom fell out of markets. Luckily for me, I wasn’t in yet. My money became available, and I invested, in January 2009, near the bottom.

All I meant in my original comment was that even though I wasn’t happy with the overall situation, it could up benefitting me if, as some people think, there is a fairly major correction on the horizon – making lemonade from lemons and all that.

(Note to self: Never try to simplify a discussion by leaving out relevant information!)

“Ed seems to be an asset investor, with a focus on equities.” — Steve

That is because his business depends on it; he sells equities.

You NEVER read Ed extoll the virtues of any other asset class or investment vehicles other than equities and mutual funds — even if those others are superior, either stand alone or by investor suitability.

“I am a business investor, I invest by taking partial ownership of businesses.” — Steve

Interesting view point, and one I share, with examples to follow.

“It is easy to beat the market. Just stay fully invested all the time. Then whenever there is a big drop, double down…” — Ed

**Still waiting to find out how this is mathematically possible.**

Other than the obvious quantum physics quandary, there is absolutely no reason for anyone to ever be “fully invested” 100% in equities “all the time” — EVER.

One basic example is Browne’s Permanent Portfolio (PP) which requires a mere 25% of liquid assets to be invested in equities, with rebalancing done once a year (in conjunction with the other sectors — bonds, cash, and gold).

From 1972-2011 the 25% equity PP returned a CAGR of 9.7%; a 100% stock portfolio returned 9.7% over the same time period.
The worst 1-year return for the PP was -5%.

Amazing that someone would want to sell you 75% more stocks which do absolutely nothing but add volatility to your portfolio.

(There is another analysis, which I am trying to locate, which places the 100% stock portfolio return at <1% greater than the PP. However, that percentage was saddled with volatility which far outweighed the miniscule additional return.)

Now for some real-life examples.
At the start of 2009 I divested 2/3 of my liquid assets from the stock market, that is to say, I became not fully invested all the time.

I put 1/3 into two private equity companies (oil and farmland).
As Steve put it, I took partial ownership in businesses (complete with certificate, something I'm sure MFGlobal clients wish they had).

Thus far I have reaped a 13.5% CAGR vs. the 13% S&P 500 over the same time period — but without the volatility (ie. my portfolio didn't drop 140 points on a fake Twitter post).

I took the other 1/3 and started a personal business buying and selling silver bullion.
From 2009-2012 my CAGR was 31% — that's net profit.
In 2013 the silver price has plummeted 24.5%, yet it's been my most profitable year with 45% gains thus far.
(How much profit did you make last time your 100% stock portfolio was down 25%?)

Thus, by divesting 66% of my money out of the stock market, even at it's near bottom, and investing that money in BUSINESSES — not buying more stocks — I've enjoyed a total average annual return of 23.75% vs. the 13% S&P 500 return over the same period.

I would have lost almost 11% per year had I stayed "fully invested" and/or "doubled down".

Yes, it is true, the stock market rarely produces millionaires.

Next post I'll probably address the so-called stock market earnings.

p.s. — my remaining equity money has performed at par.

I think that this shows a great pictorial version:

(For some reason it’s not working as well as it once did, could be my computer. You can plot gold and real estate on it as well).

It shows quite a striking trend with the long term historical rates of returns for asset classes. (Before the “you couldn’t invest in the market back then etc” starts it’s the historical data data that’s important.

Also of interest is the “fully invested” box.

Interesting nonetheless.

Very nice post. Most studies find timing the market as impossible to do. But your article refines this theme and shows some sweet spots to look at. I loved the John Templeton quote. Very nice job here!

Hi Steve,

You casino example is not an apples-to-apples comparison. If you lose 50% on the first bet, that does not help you for the next bet.

With the stock market, if it falls 20%, then the market is 20% cheaper than it was (unless something has happened that reduces the mid-term profits of the companies on the stock market).

In addition, major market crashes tend to be far over done as emotional investors panic to sell. That is probably the main reason that there has so consistently been a large up year right after a large down year.


Every post is so darn long. I’m not reading anything over a few paragraphs. Please, keep your responses shorter, especially Ed and SST. Ed, as a professional to another, learn brevity.

Ed, first question, how do you stay 100% invested at all time, and double on big drops? You borrow to leverage 2-1? And how do you judge a big drop from a smaller drop? What if you misjudged it too early, it falls more, get margin called, go bankrupt, and then it starts to go back up again… why be so aggressive with your clients retirement money?

Ed, second question, you state: market is cheap because PE is 14. Yes it is 14. But earnings are at historical high (70% above mean). I know what you think; this time is different. But its not. It never is. When earnings reverses to the mean, PE will be above 20. Still cheap? Markets won’t fall? And when it falls, as it often does, your clients will be fully invested, taken huge paper losses, and be told to borrow to double on this drop. Right? After all, every big drop is like 2009, it comes back quickly, always.

Goldberg, you raise some good questions. So (trying very hard to keep this less than a few paragraphs), I’m wondering how you will know when earnings have reverted to the mean. Will they go back to the level they were in 2005? 1990? 1950?

where does one go to find the PE for overall markets (such as for the S&P 500, etc)?

hope that’s not a naive question…

@SST equity diversification is always misunderstood IMO and being 100% invested makes me want to cringe a bit haha. I agree with you, especially in reference to modern portfolio theory. When it comes to equity positions, most people go overkill and even in the best cases it only marginally helps them.

I would agrue that your real life example in fact did “double down” but not in the traditional sense. In a “depressed” market you reallocated your assets into opportunities that traditionally are more risky. I know this is a generalization, but you were rewarded for that reallocation. You saw opportunity and took advantage of it. I believe that Ed was simply trying to get the point that the average person typically panics in times of stress, when historically these are times with the greatest opportunity to build in margins of error via RoR, asset purchase, etc.

Hi Andrew,

I guess the way I look at it, the moving average timing model is a lot of work with no real payoff other than to reduce risk. If instead of trying to avoid volatility, you embrace volatility and look at big downturns as buying opportunities, you can get a higher return with little effort.

Jeremy Siegel studied moving averages for a 120-year period. He ran the 200-day moving average from 1886-2006, a much longer time. He found the buy-and-hold made the market return of 9.7%/year, while the market timing model mad 10.2% before costs and 8.6% after costs. It required close monitoring and there were 350 trades in total.

When he took out only the 1929-32 crash, buy-and-hold made 11.8%/year, while the timing model made 10.8% before costs and 9.2% after costs.

See? A lot of work with similar or lower returns.

It is a decent strategy if you have the discipline to follow it and want to reduce volatility.


Hi Andrew,

In the interest of keeping the posts shorter, I’ll address your 3 points separately. You are right that P/Es have no short term predictive benefits. It does have some longer term predictive benefits, though.

I use it mainly as a general indicator of where we are and what to possibly expect long term, meaning say the next 10 years.

Jeremy Siegel found that using the last 5-year average P/E explained 25% of the stock market movement over the following 5 years.

Remember, I’m quoting today’s forward P/E. Shiller’s P/E is the average of the last 10 years. If P/Es stay where they are, today’s P/E will be the Shiller P/E, which is a reasonable predictor of the next 20 years or so.

P/Es are more interesting when you compare them to bonds. The Fed Model is based on this relatively close correlation since about 1970 between the earnings yield, which is the E/P (or P/E upside down) of the stock market with the yield on the 10-year bond.

The correlations have been quite close with stocks sometimes a couple years ahead, until early last decade when they went opposite directions. Bond yields have kept falling while the earnings yield on stocks has kept rising.

That means that today the stock market is the cheapest relative to bonds that it has been since the 1970s – shortly before the great bull market of the 1980s through the 1990s.

This does not tell me anything short term, but gives me confidence that stocks should provide a good average return in the mid to long term future (say 10 years or more).


Hi Andrew,

Using the 20% drawdown as a buying opportunity has been quite reliable. I know many people fear drawdowns of 60-80%, but they don’t really happen under normal conditions.

I have the calendar returns of the S&P500 since 1871. In calendar years, here are the largest drawdowns:

Drawdown Years to recover
1929-32 63% 4
1973-74 38% 2
2000-2 38% 4
2008 37% 4
1937 32% 6
1907 24% 1

Here are the only 5 calendar declines of more than 20% that have happened since 1871 and the next year (excluding 1929-32):

2008 -37% 2009 27%
1937 -32% 1938 18%
1974 -27% 1975 38%
1907 -24% 1908 39%
2002 -22% 2003 29%

If you take the top day or month to the bottom, you get larger amounts. However, in calendar years, 40% has been about the maximum. Note this is the U.S. market, for which we have the longest data.


Hi Maybenot,

You can find the market P/Es here: . Look at the S&P500 estimate.


@Goldberg #39 — “Ed, first question, how do you stay 100% invested at all time, and double on big drops?”

I too have been trying to solve this one, but with no luck.
Hopefully we’ll get an answer before the next big drop.

@Jamie #36 — “Before the “you couldn’t invest in the market back then etc” starts it’s the historical data data that’s important.”

Sure it is — in theory.
The only thing that counts is empirical data.

Theoretically, time travel is possible.
Practically, it is not. (Yet.)

@fiscallyfit #42 — “…you reallocated your assets into opportunities that traditionally are more risky.”

Can you explain to me how you conclude non-public companies and personal businesses to be more risky than stocks, especially basic material companies? I’m sure the owners of Cargill sleep very well at night.

“Ed was simply trying to get the point that the average person typically panics in times of stress, when historically these are times with the greatest opportunity to build in margins of error via RoR, asset purchase, etc.”

Except that Ed’s ONLY solution to a down market is to buy even more stocks, and to NEVER allocate any money elsewhere which could, as demonstrated, bring even greater returns.

Buying more of the same will only get you more of the same.

re#39: “Every post is so darn long. I’m not reading anything over a few paragraphs.”

The internet has done such wonders in the advancement of patience and attention span. ;)

@Ed #44 — “If instead of trying to avoid volatility, you embrace volatility and look at big downturns as buying opportunities, you can get a higher return with little effort.”

i) as requested numerous times by multiple posters, how can a person be “fully invested” in stocks and still have cash allowing “buying opportunities”?

ii) as the Permanent Portfolio has demonstrated, the additional risk adopted with a further 75% stock allocation far outweighs the sub-1% return of being “fully invested”. The worst year for the PP was -5%, thus requiring no panic mode or “doubling down” or “20% drawdown” strategy etc. et al.

In addition, why continually use unrealistic data which spans almost 150 years? You have said yourself the average investment range is ~35 years, so why not provide and work with 35-year data sets?

The story is a good one to consider. HOWEVER, what is the end game?

How can one make the money last without a lot of risk and still have money to enjoy and spend in retirement?

Hi Steve,

Maybe we think more alike than you think. I agree with you about investing in businesses. I talk about equities and the stock market to make a larger point about them being a reliable long term way to build wealth.

But we are investing in businesses. Remember, my investing strategy is to invest with All Star Fund Managers. They use different strategies, but mostly they look at the companies they buy as businesses to participate in their growth, instead of stocks to buy and sell.

Some of our fund managers are long term investors owning many of their companies for 10 years or more. More of them are value investors that tend to hold for 3-7 years or so, wanting to participate in a business but also to buy when it is out of favour and sell when it is popular. The odd one is growth oriented looking to buy companies they think will be dramatically larger in a few years.

I find the top investors are generally not traders or market timers, but more business investors. They will trade around their position by adding a bit when it dips and trimming a bit when it jumps, but essentially most are investing in businesses.

I don’t research the businesses myself. I find top investors to find them. Does that not mean we think similarly, Steve?