Trying Hard to Not Time the Market

Kyle and I have a decision to make!  We have some subsidized and deferred student loan debt (i.e. sitting at 0%) and we also have the full amount of money we need to pay off these loans set aside.  Most of that money is invested in mutual funds, but about $6,000 is in a CD that is maturing this month.


When we first allocated our savings, we knew we should be conservative because we had a short time frame.  Our original investment was two years ago and we had a timeframe of 2-3 years.  So we put a good chunk of the money in a CD, invested most of the rest in conservative (rating “2” in Vanguard) mutual funds, and put the final few thousand into stock ETFs.  We were willing to take some risk in exchange for the experience of investing, but maybe we were also engaging in some market timing.  It was early summer 2011 and all the media coverage was focused on the debt ceiling crisis.  We were fairly confident that the economic recovery was well underway and that the US was not going to double-dip.  We did lose a bit of money in the first few months after we made the investment, particularly in our international stocks, but it’s been up and up since then.


investing diceNow with the CD rolling over and me closing in on graduation (and therefore needing to divest the money to pay the loans), we can make another set of decisions about this money.  Seeing the money we’ve made on the portion of the student loan money we invested makes me really want to throw the money from the CD into the market as well, particularly the more aggressive investments.  But I know that is using past performance to predict future returns – a classic mistake.  We could go the opposite way, too – cash in all the investments now to lock in the gains on the thinking that there will be a “correction” following the recent all-time highs.


I’m not sure how to make this decision without allowing the recent past of the market to influence us!  We could sell now because our timeframe is short and now is when we have to make the decision about the CD, which is unrelated to the current market happenings.  We could also stay all in until the bitter end – my graduation date is also unrelated to the market moves.  I wish we had set out a plan for divesting from the beginning of this investment exercise!


Maybe it’s not too late to make a plan that avoids market timing as much as possible.  We can sell a bit now, most when Kyle graduates, and the rest when I graduate.  We need to make a plan for the specific funds to sell; all of them had minimum balances to open so I assume we can’t reduce the fund balance below the minimum.


It’s so tempting to let my attitude on the market (bullish) influence our decisions but I know that would be foolish!


What would you do with savings if you need it in a year?  Do you engage in market timing or what are your strategies to avoid it?  Have you ever divested some savings for a short- or mid-term goal?


photo from Free Digital Photos


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32 Responses to "Trying Hard to Not Time the Market"

  1. Lucas says:

    Your time frame is short and if you are set on paying off the loans (good idea), then you should start divesting out of the market and into cash to be able to pay them off. The market is up, so it is a great time to sell. You have little to gain by staying in the market for a couple more months and potentially more to loose in the short term.

    I started some investing in Peer-to-peer lending through lending club with some 1-2 year money. My goal was an investment that is somewhat uncoupled from the market movements (interest rates are, but defaults could potentially rise in extended down market). There is a secondary market for loans so it looks like it would be easy to unload all my loans for 0-1% loss very quickly, so with an interest rate >10% it looks like if i keep them for at least a month i would break even. However i wouldn’t neccessarily advise this with short term money either as it would be too much work.

    1. Emily says:

      I’m not 100% set on paying off the loans (more on that next Wednesday) but that was our original plan.

      Well, isn’t there as much to gain as to lose over the next year? Because we don’t know if our funds will be up or down a year from now in comparison with today.

      We have looked into P2P lending and are interested in it. We researched it when we originally made these investments in 2011. However, we don’t qualify to do P2P lending in NC because of our income and net worth. I think we could go through secondary markets, but we dropped the idea when we realized we couldn’t do it straightforwardly.

  2. Here is another way of looking at it: if you were not invested and simply had a pile of cash and a pile of loans, what would you do with the cash given your timeframe? Your answer is likely what you should move your positions to.

    If I were in your position, I would begin moving out of the market and into cash to pay off the loans. If I wanted a phased approach, I’d sell the riskiest assets first, moving down the list and selling the safest investments last.
    Done by Forty recently posted..Thirty Things Lighter

    1. Lucas says:

      That is a good way of looking at it. Basically figure out how to ignore the past performance and make your decision as if starting fresh. Avoids the problems with sunk costs and assuming future performance.

      1. Emily says:

        This wouldn’t work if we were paying fees for all the transactions, though.

        1. You needn’t DCA out of your positions, necessarily. From your earlier link, you mentioned you had several investments initially for the $16k debt. If you had 6 investments and a 12 month timeframe, for example, you could sell one (entirely) every two months, going from riskiest to safest. There may be a transaction fee for the sale but, hey, each one was going to be sold at some point…
          Done by Forty recently posted..Happiness and Many Small Pleasures

          1. Emily says:

            For ours we don’t have transaction fees. But other types of investments might, and it might be based on number of transactions rather than total amount of money moved.

    2. Emily says:

      If we had cash now we would probably stay in cash. However there is no guarantee that I’ll graduate in a year. Maybe it will be 2-3 more years. Not knowing our timeframe exactly is part of the confusion! If it turns out to be that long we would wish that we had invested a bit of the money.

      1. I can see where you’re coming from then.

        If you had a pile of cash and a 2-3 year time horizon (instead of 12 months) for the debts to start to accrue interest, what asset allocation would you choose? Would it be very different from your 12 month plan?
        Done by Forty recently posted..Happiness and Many Small Pleasures

        1. Emily says:

          It would be the same allocation we have now because when we started we thought we had a 2-3 year time horizon. 🙂 But I think 1 year should be all or nearly all cash.

  3. One year is pretty short term so I would avoid putting it in the market. How are the interest rates for your student loans?
    As for avoiding market timing, I have an asset allocation and I generally dollar cost average each month. I try not to pay attention to the crazy moves the stock market makes.

    1. Emily says:

      The loans are at 0% for now. Our post next Wednesday is on what their interest rates are when they come out of deferment.

      We DCA with our retirement investments, but this lump sum is a bit different. We quickly DCAed in with it (over about 2-3 weeks). I hope I won’t have to deal with lump sums much – too stressful!

  4. Is there some sort of middle ground? A short-term investment that might not yield as much as the market could, but will still give a better return than the money sitting in the bank?
    Kyle @ Debt Free Diaries recently posted..Business Ownership – Gut Check

    1. Lucas says:

      That is kind of the problem right now. you could roll short term CDs and earn maybe .25% annually so that would only be .03% a month – probably not worth it. I mentioned LendingClub – you could probably make 1% a month with the caviate that you loose 1% when you sell out early, but that is a good bit of work to do that for a couple percent gain.

      Pretty much nothing would really be worth the effort if it was only going to be in the game for a couple months.

      1. For a comparison, Ally Bank is offering .84% on their savings account right now.

        1. Emily says:

          We have most of our cash in Ally savings accounts. That’s for really short-term stuff!

    2. Emily says:

      Well, there are many degrees of “the market.” That’s why we chose some conservative mutual funds. They haven’t made as much as our all-stock funds but they also didn’t lose as much in the few months we were down. CDs or a money market account would be the next best thing but they aren’t paying much now.

  5. I have everything short term in high yield savings accounts. It’s not ideal but at least they are earning something!

    1. Emily says:

      It’s better than a checking account. I’m glad I never had a savings account that paid a high rate of return so I am not bemoaning what we get now!

  6. The Stoic says:

    I think you should focus on what your main objective is. I wouldn’t let what the market has done or what it may do influence your decision. If your intent is to pay off your loans then set the money aside or go ahead and pay it toward the loans.

    I know its tempting to think, “WOW, We’ve made this much money so far lets throw some more in and watch it grow even more! However remember that when you invested in 2011 a lot was going on to keep the markets down. Are you sure the optimism we have experienced the first part of the year will continue?

    Whatever you guys decide be sure you are comfortable regardless of what happens. Make your decision and know that you will not be impacted regardless of whether the market rises or falls. I still believe you can’t go wrong by taking your capital gains, initial capital, and lesson learned and directing it towards your debt knowing that you will be even better prepared for your next investment experience.

    Best of luck…
    The Stoic
    The Stoic recently posted..Recent Sell

    1. Emily says:

      Our main objective when we started was to gain experience investing. Now it is probably capital preservation! We could sell everything we need to pay the loans and keep playing in the markets with our gains.

      We won’t be up a creek if we lose some of this capital but it would sting!

  7. CashRebel says:

    You’ve got an interesting problem. If you were going to put your money in and keep it there for the next ten years, I’d say don’t worry about where the market is and just do it, but needing it in a few years is a challenge.
    I’d say just put it in high interest savings or a CD since all bets are off when you put money is the stock market for the short term.
    CashRebel recently posted..A Cash Rebel Recap

    1. Emily says:

      Come back next Wednesday to let me know your opinion about mid-term investing this money. 🙂 Thanks for your vote!

  8. Moneycone says:

    If you need the money in a year, don’t gamble with it! I’d go the conservative route.
    Moneycone recently posted..Your first credit card – which one should you pick?

    1. Emily says:

      How long of a time horizon would you want before you were willing to gamble a bit? And then how would you shift the asset allocation as your goal time drew close?

  9. The one big missing piece of information is what is the interest rate on your loans? Not the 0% they are at now, but the rate when they exit deferment. You need to compare the projected rate of return on your potential investments vs what you will be paying on the loans. This will help you make your decision.
    My Financial Independence Journey recently posted..Downsides of Extreme Saving

    1. Emily says:

      I’m writing more about that next Wednesday so please stop back by! But as our current plan is to completely divest before the loans come out of deferment I don’t see how what the rates will be should impact our decision. What do you think?

  10. If you need it in the next year, don’t put it in the market. We have a nice sum of money sitting around drawing little interest, but we will likely need it for taxes next year. I’ve been tempted to do something else with it, but I can’t risk that it might be at a loss when I need it.
    Kim@Eyesonthedollar recently posted..Broke in Retirement: Why It’s Important to Know Where Your Money Is.

    1. Emily says:

      You example makes me think that there are different levels of “need,” at least in my mind! If I had a tax bill due in a year I would totally keep that money in cash. But for some reason it doesn’t feel as bad to me to lose a bit of this money for our debt than it would to lose some money for taxes. Weird! But I take your point and good job resisting temptation!

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