One of the things I’m fascinated about is why some people get upset with what other people do with their money.
Every time I write in my newsletter that I’ve decided to increase or decrease risk with my investments, someone gets hot and bothered!
What someone does with their money has no bearing on what happens with your money. You have the freedom to make one giant paper money statue and light it on fire if you wish.
I choose to consciously have a purpose for all of my investments. Otherwise, there’s no point to saving and investing so much all these years. I feel sorry for folks who’ve already reached financial independence and still can’t stop hoarding money.
Let me go through some examples of market timing everybody makes, but somehow don’t get recognized. I’m certain by the time you finish reading this article you’ll find more purpose with your money.
1) Front loading your 401(k) and other pre-tax retirement accounts. If you are lucky to receive a bonus or have enough cash flow during the beginning of the year, it’s commonplace to max out your 401(k), IRA, HSA, Solo 401(k), Roth IRA, or whichever tax-advantageous retirement account you have.
People like to get these accounts out of the way, just like how people like to pay themselves first with each paycheck. How and how much you get paid results in market timing.
2) Deciding when to use your 529 plan. You may spend 18 years contributing to a 529 plan for tax-deferred compounding until your kid decides to go to college. Whether you use the funds at age 18, 19, 20, 21, or 22, that’s up to you. You might even decide to sell some stock to pay for private grade school since that’s a new rule.
But what if your child decides to defer college or take six years to graduate? What if your child decides never to go to college? Ah, market timing.
3) Deciding to take distributions from your 401(k). You can take penalty-free distributions from your 401(k) after age 59.5. Once you start withdrawing, you can stop and start again innumerable times until age 70.5. Once you’re 70.5, you must withdraw a specific portion, the Required Minimum Distribution, from your nest egg each year.
Because you are in great health and don’t need your 401(k) funds given your large after-tax portfolio, you decide to wait until you’re forced to take RMDs at 70.5. Your good genetics and financial preparation results in market timing.
4) Deciding to de-risk your House Fund. If you’re planning on buying a house within the next 6-12 months, you should probably keep your House Fund in 100% cash or short-term Treasuries. You don’t know exactly when the perfect house will come along. Even if you find the perfect house, you might not win the house because your offer isn’t competitive enough.
Let’s say you get a surprise promotion at work. This promotion gives you the confidence to finally buy a primary residence. As a result, you decide to de-risk your House Fund into 3-month Treasuries and aggressively start looking for a dream home. Your promotion made you time the market.
Related: How To Invest Your Downpayment Depending On Your Time Frame
5) Deciding to invest 100% of your severance check in the stock market. Getting a severance check is a nice windfall, especially if you had planned to quit your job anyway with nothing. But who knows exactly when you will be able to successfully negotiate a severance?
Management might suddenly offer up severance packages one year due to a restructuring. Or you might get sick and tired of your boss another year and want to leave. Whenever you do negotiate a severance and invest it all in the market, that’s market timing.
6) Deciding to sell your rental property because your tenants moved out. You might have had a great 12-year run as a landlord, but couldn’t find replacement tenants at the same rent. With the desire to simplify life, you put your house on the market and discover its worth 70% more than you bought it for. Therefore, you decide to take advantage.
If your tenants hadn’t moved out, you wouldn’t have been able to remove them even if you had wanted to due to strong tenant rights laws in your city. Your tenant’s decision to move out due to a new job opportunity is market timing.
Related: Why I Sold My Rental Home: Had To Live For Today
7) Deciding to reinvest your house sale proceeds in a diversified real estate portfolio. After riding one concentrated position up 70% with leverage, you decide it’s best to diversify your real estate holdings by investing outside of your expensive coastal city.
As a result, you invest in several commercial real estate properties in Austin, Texas where cap rates are 5X higher. Not only are you earning a higher return, but you’re also earning it passively.
Related: Focus On Long-Term Trends: Why I’m Investing In The Heartland Of America
8) Deciding to buy a new primary residence five years later. Your commercial real estate investments in Texas pay out five years later with a 12% IRR.
Since the initial investment, you and your partner had a baby and decide it’d be nice to move out of your tight two bedroom apartment to a three bedroom house with a backyard. You didn’t plan to have a baby, but here he is! You use the proceeds from the Texas properties to buy a nice house.
The unwinding of your commercial real estate portfolio and the arrival of your baby is market timing.
9) Deciding to stop work to take care of your baby. After going back to work after three months of parental leave, you feel terrible dropping off your baby at a daycare center. As a result, you decide to stop work until your boy goes to preschool at 3.5 years old.
Your partner still works a stable job, but due to the loss of your income, you decide to sell some stocks to pay for general living expenses. Your guilt about leaving your baby in the hands of strangers results in market timing.
Related: Career Or Family? You Only Need To Sacrifice For 5 Years At Most
10) Deciding to cash out of your IPO proceeds. Your partner’s company successfully IPOs after she worked there for six years. Her stock options are worth $1.5 million and she also wants to stay home and raise her boy as well.
Once the lockup period is over, she decides to sell 80% of her stock and diversify her net worth into index funds, REITs, municipal bonds, and short-term Treasuries. At one point, her net worth was comprised of 90% company stock.
The CEO’s decision to sell a piece of his company to public retail investors results in market timing for you.
Related: Career Advice For Startup Employees: Sleep With One Eye Open
Don’t be naive. Every decision you make is market timing. Life is an unpredictable journey.
At the very least, everyone should save and invest as much as they can when they can. Have financial fire power to withstand anything life throws at you.
Every dollar you save should have a purpose. Don’t just think the main purpose for all your saving and investing is to live a comfortable retirement. That’s too amorphous a goal.
Have specific purposes for your investments, such as buying a house, paying for your kid’s tuition, remodeling your home, taking care of your parents and so forth.
In addition to making sure your money has a purpose, practice taking profits for a better life. If you do, ironically, you’ll still likely end up with more than you’ll ever need because you’ll have been so focused on accumulating and optimizing your investments.
Don’t let what other people do with their money affect how you feel and do with your money. You must focus on your own financial mission.
We are not gods. We do not know the future, nor will we live forever. The person who dies with too much loses.
My financial path is completely different from yours. So are my needs and desires. I will continue to make financial decisions that best fit my family’s needs. So should you.
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Readers, why do people get upset at what other people do with their finances? Why do we blame people for market timing, when our entire lives are unpredictable? Now, if we’re talking about day trading, that’s not something I recommend.