The basic idea of many people aiming for FIRE/HOT is to invest in low-cost ETFs that exactly track the performance of the world-wide stock market as a whole. Besides not picking winners, people keep the costs low and don't time the market. The latter one is most tricky. Even if you think you are not timing you might be timing after all. At least I am.
Why timing is bad
Our investment strategy is to buy the same amount (in euro's) of an ETF every month on the day our salaries arrive. This means there is no need to log into our account at any other point during the month. This keeps the psychological burden low and for me it is most easy to stick to the plan like this.
My timing is not always bad, sometimes it is really good! See for instance here a post I wrote just before the recent market correction. I could have prevented a 7% drop of my portfolio by selling. The problem is that I have no clue whether the correction has now ended. Hence you would have to time correctly twice, not only to get out but also to get back in not to miss an upswing.
Sometimes my timing would have been bad from the start. Five years ago I felt the markets were on the high side, considering the financial crisis was resolved with more debt. This had to go wrong! But it did not. Markets went up by a lot in the last five years. It still feels we are overbought at this point but I'll stay put.
Timing happens all the time
So that is clear, I should not time. Unfortunately it is not that simple and I am still doing it. Not the obvious way as described above but in more subtle ways.
With the markets down around 7% at the moment, I thought it was smart to buy an extra portion of our favorite ETF this month. Buying extra can never be bad as I also still stick to the plan, right? Wrong! Where does the extra money come from? Apparently our cash position is too large as I am happy to throw more into the market. This is a sneaky version of dollar cost averaging which the numbers tell you should not do.
Dollar cost averaging is certainly better than not getting into the market at all. So if investing a lump sum scares the crap out of you by all means use dollar cost averaging. But be aware that you are, and that the numbers are against you. I only realized I am doing it after a recent discussion in the FireNL Slack group.
I don't see the point of having a bond position. Not because I feel I have balls of steal and can handle the full volatility of the stock market. No, it just feels the interest rates are so low that this has to end somewhere soon. As a consequence, bonds will go down. I prefer to keep cash instead of bonds. Darn, timing again! Who says interest rates cannot go down further or stay around 0 for another decade?
Any other sneaky versions of timing I am blatantly unaware of? Let me know, it might help me to avoid them!