Last week, I suggested considering tax-exempt money market funds as an alternative to high-yield savings accounts. As an example, I looked at one of the best options for me, the Vanguard New Jersey Tax-Exempt Money Market Fund (VNJXX), citing its 4.83% 7-day yield. Today, a week later, the yield is already down more than 100 basis points to 3.82%. This is still a great rate, beating the effective after-tax interest rate of all the top savings accounts, but it just shows that the best things don’t last very long.
Over the past week, I’ve also tried to take advantage of the dips in the stock markets. My first attempt was posted too late to get the price I wanted. Rather than buying VTSMX at $27.05 per share, my transaction wasn’t completed until after a rebound. The price I received per share was $28.42.
Realizing my timing error, and trying to take advantage of another decline at the end of last week, I moved money in my SEP IRA from a money market fund into VTSMX. This time I received a price of $27.04, one cent lower than the price I should have had with my initial purchase, but with a much smaller investment. Hoping for a rebound the following day, when the House was expected to pass the $700 billion bailout bill in its adjusted form, the market declined further, and I missed the opportunity to buy the fund at $26.62 per share.
I tried again on Monday when the market was in another decline. I timed the transaction right and received the day’s price of $25.56 per share for the same smaller amount of an investment. My quick trigger finger didn’t pay off this time, however, because the market continued to drop on Tuesday. If I had waited a day, I could have benefited from the price of $24.09 per share.
Each investment decision I’ve made during the current market downturn hasn’t paid off how I would have liked in the short term. The good news is that if the market continues to decline, I’ll have more opportunities to buy at lower prices. It may take some time, but the stock market should eventually provide acceptable returns.
It may be considered “market timing,” but I feel comfortable spending some money to try to “find” the bottom. Here are a few reasons.
- I’m investing in small amounts so I am not risking a significant portion of my portfolio.
- My time horizon for retirement is several decades in the future, so there is time for the market to ascend, even if we experience an extended period of a flat market in the next decade.
- Timing the bottom is next to impossible, but buying when the market dips in its search for the bottom will help increase my chances of being close enough.
- I’ll continue to follow automatic patterns for the bulk of my retirement investments, with an automatic investment in my 401(k) every two weeks and a bulk investment in my SEP IRA once a year.
Those who make market timing a main investing strategy end up performing much worse than those who follow the index. I do believe that it is worthwhile to include some form of market timing as a small part of an overall strategy, particularly if you are investing with the distant future in mind. Don’t expect to be able to time the market perfectly, but by going against the grain, buying smartly while everyone is panicking and reconsidering your holdings when the market is exuberant, you stand a decent chance of adding a little flair to your returns over time.
Of course, none of this will be true if the economy in the United States never recovers. But I find the chances of that to be very low.
Published or updated October 8, 2008.