Market Timing Is Frugality Applied to Stock Investing

There are few people who are opposed to frugality. Some practice it, some don’t. But even those who don’t practice it generally acknowledge that it would be a good thing if they did. We all earn limited amounts of money and we all want to see our limited amount of money go as far as we can make it go. So frugality is almost universally recognized as a plus.

The one big exception is in the purchase of stocks. When it comes to buying stocks, most of us actively avoid practicing frugality. We often parrot the marketing slogans of The Stock-Selling Industry. We say that “timing doesn’t work.”

How frugality works in the stock market

It’s not possible to practice frugality with your purchases of stocks without changing your stock allocation in response to big price swings and that’s a form of market timing. So to say that “timing doesn’t work” when buying stocks is to say that “frugality doesn’t work” when buying stocks. Lots of people believe it. But could it really be so?

It cannot be so. It’s just not logically possible. There never can be any asset that offers the same value proposition at all possible prices. So stocks must offer a better deal at some valuation levels than they do at others. If that’s so, then we all should be going with different stock allocations at times when different valuation levels apply.

This is elementary and inescapable logic. Going with a higher stock allocations when stocks are well-priced and a lower stock allocation when stocks are poorly priced must deliver higher returns at lower risk than following a Buy-and-Hold strategy (and of course the entire historical record of stock performance shows that this has indeed always been so).

It’s not a small difference we are talking about here

We’ve all heard stories of people who for years spent money foolishly and then got religion and turned their lives around. Often the tale is not only that these people manage to get out of debt. Often people who discover frugality by hitting bottom are in not too long a time on the path to early retirement.

The power of frugality to change middle-class lives is counter-intuitively large. The reason is that most of us save only small percentages of our income. If becoming frugal takes you from saving 5 percent of your income to saving 20 percent of your income, you have increased your dollars saved by 400 percent. That’s going to speed up the day you achieve financial freedom by not a small amount but by a very large amount.

Imagine where those who practice frugality would be if they extended their value-seeking orientation to their stock purchases?

The road to true prosperity

What is the one item that most middle-class people spend the most on in the course of a lifetime? It’s not vacations. It’s not health insurance. It’s not education. It’s not raising children. It’s not houses. It’s not gifts. It’s not cable. It’s not cell phones. It’s not food. It’s not clothing. It’s not transportation.

For most of us, it’s stocks.

Think about it. If you believe that you can count on a 4 percent return on your portfolio in retirement, you need to save $1 million to be able to live on $40,000 in retirement. If you go with a 70 percent stock allocation, that means that you will be buying $700,000 worth of stocks. There’s a good chance that you will not spend $700,000 on anything else you buy in this journey through the Valley of Tears.

Can you imagine how much easier life would be if you paid some attention to the value proposition you obtained by spending that $700,000? Can you imagine how much sooner you would be able to retire if you bought stocks like you buy everything else, buying more (that is, going with a higher stock allocation) when prices are good or reasonable and buying less (that is, going with a low stock allocation) when prices are unfair and obscene and inflated?

I’ve checked the historical data to see how much sooner the typical middle-class person could retire if he said “Nuts” to the stock-selling experts when they try to persuade him that there is no need to time the market and practiced frugality in investing instead. The answer is that adopting this one frugal practice would permit you to retire five years sooner than you could following a Buy-and-Hold strategy.

There are hundreds of blogs today preaching the merits of frugality. There are also hundreds of blogs preaching the merits of Buy-and-Hold. Can you imagine how much good we could do if we could get the owners of the latter group of blogs to take in the message of the former group of blogs and to start writing articles helping us all to learn how to spend our money wisely when buying stocks?

Rob Bennett is a big fan of the Tightwad Gazette. His bio is here.

4 Responses to Market Timing Is Frugality Applied to Stock Investing

  1. Rob – Thank you for the great article. I have been writing about this subject on my blog for quite some time. I use a tactical or active asset allocation strategy for my Arbor Asset Allocation Model Portfolio (AAAMP). I have never seen it written so practically as you have in this article. While others have suffered from a buy and hold strategy frugal investors have been able to take advantage of the volatility the markets have provided. Buying when stocks are bargains and avoiding them when their not makes financial sense.
    Thank you.
    Ken Faulkenberry

  2. Ken:

    Thanks for those kind words.

    I checked out your site. It looks like you are doing important work for middle-class people. Actually, I have had a number of people ask me if there are funds that follow a valuation-informed approach. Now I have a name to give them.

    Your encouraging words have brought a nice measure of cheer to my Saturday afternoon.

    Rob

  3. Thank you for the kind words Rob. I really like your blog. I have referenced this article on my latest post. I assume you will receive a ping back. Feel free to contact me anytime if I can help.
    Ken

  4. Thanks Rob for pointing out that a lot of people spend more money on stocks than on anything else.
    It is very true and one just doesn’t realize it always.
    To me long-term market timing is that logical that I do not understand why not everybody sees that logic.It maybe has to do with that long-term market timing and short-term market timing are all discussed as one and the same thing.

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