Bah, can't edit title


Selling S&P in 401K due to market turbulence, secondary market timing risk

I'm looking to discuss a secondary issue i thought of with regard to market timing in a 401K funds. I do not think I've ever heard anyone speak to it when they say do not time the market.

Timing the market is risky and I'm not looking for a discussion on that.


That said I know people who are timing the market, lowering their S&P and putting it into stable value and planning to go back in at a lower S&P value



Here's the question and again, this is aside deom the market timing risk we all know.

A person with a 401K thats been accumulating S&P shares for 20 years owns shares from.back when the S&P was 1200, or 20% of the current price. The S&P has a dividend thats around 1.2%, which isnt much but considering they would own shares at such a low price...

Is the dividend paid per share? If someone sold S&P at 6,000 and bought back at 5,000, wouldn't they substantially decrease their dividend considering their current average share cost may be 3,000. Over time losing out on that 1.2% on a large number of shares would seem to be an additional reason not to time the market?


Thoughts

The best answer to this is to evaluate each potential investment in terms of total return over time.

Depending on their circumstances, companies can choose different ways to deploy cash not immediately needed to operationally support their business. Some of the more popular:

• Pay cash dividends to stockholders
• Pay down debt
• Buy back their own stock
• Make tactical or strategic acquisitions (ranging from adding scale from buying a competitor to buying a company with a capability you'd otherwise have to build from scratch)
• Depending on the industry, buying tax credits or similar items
• And more recently, "invest" in bitcoin or other non-cash methods to boost returns (if everything goes right)

So, you can't really linearly think about this - it depends on the range of alternatives available, and the desires of management.

I maybe misunderstanding what you are asking…but divided isn't payed out as a percentage. It is a set $ amount per share not a percentage. So your dividend is directly tied to number of shares, not share price.

I bleed maroon said:

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The best answer to this is to evaluate each potential investment in terms of total return over time.

Depending on their circumstances, companies can choose different ways to deploy cash not immediately needed to operationally support their business. Some of the more popular:

• Pay cash dividends to stockholders
• Pay down debt
• Buy back their own stock
• Make tactical or strategic acquisitions (ranging from adding scale from buying a competitor to buying a company with a capability you'd otherwise have to build from scratch)
• Depending on the industry, buying tax credits or similar items
• And more recently, "invest" in bitcoin or other non-cash methods to boost returns (if everything goes right)

So, you can't really linearly think about this - it depends on the range of alternatives available, and the desires of management.

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And as for dividends on the S&P, multiply the above by 500 companies each making their own cash decisions, and what you get is derived from those. Yes - your dividends are paid per share, and if the SPY (or equivalent) has gone up 500% during your holding period, your dividends are paid on the initial number of shares you bought (and your effective rate would be quite a bit larger than the 1.2% rate you quoted. Once again, look at total return (capital gains plus income) when analyzing anything you want to buy.

cslifer said:

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I maybe misunderstanding what you are asking…but divided isn't payed out as a percentage. It is a set $ amount per share not a percentage. So your dividend is directly tied to number of shares, not share price.

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Thanks, thats what I thought but wanted to make sure. That's to me says selling high to buy back low on a fund a person has been accumulating for a long time is another reason to not time the market.

Using simple math, today's 1.2% dividend on shares accumulated over 20 years could mean a significant future loss, almost halving the dividend using my above example because you'd buy back significantly fewer shares than you had, even though it was sold at 6K, bought back at 5K, because the average share cost was S&P at 3K

I bleed maroon said:

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The best answer to this is to evaluate each potential investment in terms of total return over time.

Depending on their circumstances, companies can choose different ways to deploy cash not immediately needed to operationally support their business. Some of the more popular:

• Pay cash dividends to stockholders
• Pay down debt
• Buy back their own stock
• Make tactical or strategic acquisitions (ranging from adding scale from buying a competitor to buying a company with a capability you'd otherwise have to build from scratch)
• Depending on the industry, buying tax credits or similar items
• And more recently, "invest" in bitcoin or other non-cash methods to boost returns (if everything goes right)

So, you can't really linearly think about this - it depends on the range of alternatives available, and the desires of management.

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This would be in a 401K S&P large cap fund, that pays around 1.2% dividend which is selected to reinvest dividends

jamey said:

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I bleed maroon said:

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The best answer to this is to evaluate each potential investment in terms of total return over time.

Depending on their circumstances, companies can choose different ways to deploy cash not immediately needed to operationally support their business. Some of the more popular:

• Pay cash dividends to stockholders
• Pay down debt
• Buy back their own stock
• Make tactical or strategic acquisitions (ranging from adding scale from buying a competitor to buying a company with a capability you'd otherwise have to build from scratch)
• Depending on the industry, buying tax credits or similar items
• And more recently, "invest" in bitcoin or other non-cash methods to boost returns (if everything goes right)

So, you can't really linearly think about this - it depends on the range of alternatives available, and the desires of management.

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This would be in a 401K S&P large cap fund, that pays around 1.2% dividend which is selected to reinvest dividends

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Okay?

The answer is the same. You're not "losing out" on dividends unless you sell your shares.

I bleed maroon said:

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I bleed maroon said:

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The best answer to this is to evaluate each potential investment in terms of total return over time.

Depending on their circumstances, companies can choose different ways to deploy cash not immediately needed to operationally support their business. Some of the more popular:

• Pay cash dividends to stockholders
• Pay down debt
• Buy back their own stock
• Make tactical or strategic acquisitions (ranging from adding scale from buying a competitor to buying a company with a capability you'd otherwise have to build from scratch)
• Depending on the industry, buying tax credits or similar items
• And more recently, "invest" in bitcoin or other non-cash methods to boost returns (if everything goes right)

So, you can't really linearly think about this - it depends on the range of alternatives available, and the desires of management.

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And as for dividends on the S&P, multiply the above by 500 companies each making their own cash decisions, and what you get is derived from those. Yes - your dividends are paid per share, and if the SPY (or equivalent) has gone up 500% during your holding period, your dividends are paid on the initial number of shares you bought (and your effective rate would be quite a bit larger than the 1.2% rate you quoted. Once again, look at total return (capital gains plus income) when analyzing anything you want to buy.

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Gotcha, I missed your follow up initially

I think was he is saying is that he is considering selling to lock in some profits, then buying back in later. If that is the case he would receive less dividends as he would have fewer shares. Depending on the size of the account I guess this could actually be significant.

cslifer said:

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I think was he is saying is that he is considering selling to lock in some profits, then buying back in later. If that is the case he would receive less dividends as he would have fewer shares. Depending on the size of the account I guess this could actually be significant.

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That's right. A friend of mine did this, going 70% into stable value a few months ago and he did not get back in after April 2nd because he thought it was going down 40% from all time highs

I told him the pros say don't time the market. His 401K is about 20 years old so he was buying the S&P back around $1200 some 20 years ago. Maybe the S&P falls back to 5K or so but he's going to buy back a lot fewer shares but would gain about 14% off the price action once it gets back to where he got out. But then he'll have far fewer shares for decades into the future

I guess this could also be an argument for not transferring 401K funds with a new job

Conceptually, once again, you should reevaluate every holding daily, and dump it if you believe there's something that you believe will outperform it over time. Your portfolio ought to be full of the highest risk-adjusted total return future expectation stocks that you can find, at all times.

In reality, over longer periods, the S&P outperforms 80-90%+ of actively managed funds, so it's a great place to allocate, set and forget. And if you hold it for a long time, dividends as a percentage of total return are cumulatively larger, and therefore probably a bit safer, but may drag the overall return down, depending on timing.

It probably isn't really a valid factor in whether or not to rollover funds when changing jobs. Investment choices available, rules, and expense ratios are much more valid reasons to keep the old 401k or rollover to the new one.

I think original poster is confusing cost basis with the dividend payment. Cost basis has no bearing on the current dividend paid. The scenario is liquidating a position of certain value and reinvesting that same value at lower price, ie more shares.

Making up numbers for example below.

Let's say investor today owns 100 shares @ current price of $100. Today value is $10,000. His COST BASIS s $50/sh or $5000 but is immaterial for dividend payment. His dividend per year is $2/share or $200.

If he liquidates it all, and let's say he rebuys 2 months later at a lower price. He takes that $10,000 and buys at lower price of $80/share. He get 125 shares. His annual dividend is now $250. His cost basis is now $80/share or $8000.

I'm not sure how this makes sense. You have 10 shares worth $10 each for a $100 investment. A decade later those 10 shares are now worth $100 each, so your account balance is $1,000.

You sell, pocket the $1,000, and then buy back in when the stock is $50/share. Now you can buy 20 shares at $50 for a total investment of $1,000.

As long as you buy back in for less than what you sold you'll end up with more shares than you previously had.

Tormentos said:

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I think original poster is confusing cost basis with the dividend payment. Cost basis has no bearing on the current dividend paid. The scenario is liquidating a position of certain value and reinvesting that same value at lower price, ie more shares.

Making up numbers for example below.

Let's say investor today owns 100 shares @ current price of $100. Today value is $10,000. His COST BASIS s $50/sh or $5000 but is immaterial for dividend payment. His dividend per year is $2/share or $200.

If he liquidates it all, and let's say he rebuys 2 months later at a lower price. He takes that $10,000 and buys at lower price of $80/share. He get 125 shares. His annual dividend is now $250. His cost basis is now $80/share or $8000.

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Won't the system sell by FIFO, specific shares or on average all the older shares purchased at a lower price and therefore more of them to get to 10,000

I believe thats how my self managed account works unless I tell it to specifically sell the higher or lower priced shares. That's not an option in the 401K funds

I don't follow... He would end up with more shares when he buys back in if he successfully timed the sell and rebuy.

I.e. say you sell 100 shares of a fund that sells for $100 a share you take out $10000, when you rebuy that fund a few months later after it tanked to $80 you would be able to buy 125 share. So by timing the market you have 25 more shares for "free" than if you did nothing.

Yeah I don't follow either, the cost basis is whatever it is. FIFO has no bearing on # of shares sold.

If the market price is $100 and you put in a sell order for 100 shares you get $10,000, regardless of whatever cost basis method you are using. If you use that same $10,000 to rebuy at a lower price you get more shares…..I feel like I'm repeating myself.

I am starting to wonder if people sell during a down market to prevent "losing any more" then re-buy at the exact same price they sold out at a few months and think they saved money by missing that dip. In that case yes that wouldn't be a good idea because you come out with less if you miss a dividend. It only works if you rebuy at a lower price and end up with more shares than you started with.

edit: mostly directed to OP not Tormentos

I think i see the math now. The amount sold at say 6K S&P includes a lot of profit, so as long as it's repurchase at a lower price that basis plus profit allows for buying more shares than before.


What actually got me thinking abiut this to begin with was seeing how my wife rebalaced her account. If she had S&P, international and bonds for example and just wanted to move money from international to bonds let's say. She was selling everything, including the S&P and buying it right back. She thought she had to touch everything instead of just what she was moving. It scared me thinking if she just sold then bought the S&P she would get less shares/dividends going forward


What yall are saying is it's the same number of shares. Makes sense now. I've been puzzling over that for a while


Then my friend recently sold 70% of everything and bought stable value and reminded me. He sold at 5900, where we are today but had the opportunity to buy the S&P back when it hit 4800 last month

jamey said:

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I think i see the math now. The amount sold at say 6K S&P includes a lot of profit, so as long as it's repurchase at a lower price that basis plus profit allows for buying more shares than before.


What actually got me thinking abiut this to begin with was seeing how my wife rebalaced her account. If she had S&P, international and bonds for example and just wanted to move money from international to bonds let's say. She was selling everything, including the S&P and buying it right back. She thought she had to touch everything instead of just what she was moving. It scared me thinking if she just sold then bought the S&P she would get less shares/dividends going forward


What yall are saying is it's the same number of shares. Makes sense now. I've been puzzling over that for a while


Then my friend recently sold 70% of everything and bought stable value and reminded me. He sold at 5900, where we are today but had the opportunity to buy the S&P back when it hit 4800 last month

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This has been a VERY confusing topic. If this indeed is 401K money, there is zero basis, and that is completely irrelevant (except in a very few strange after-tax contribution scenarios). Generally, every dollar contributed to a 401k has a $0 basis, because you've never paid tax on it, and won't until you start withdrawals.

If you're talking about initial cost (not tax basis), then it's still irrelevant, in my mind, as you're evaluating future performance going forward.

Glad you got it... I know you said you didn't want to talk about the risks of the strategy but that is why they say timing the market you have to be right twice. You have to be corrected that you will have an opportunity to buy cheaper and you have to actually take that opportunity when it happens. I am sure he felt great when he missed out on that 20% loss, but by not buying in he didn't really do anything.

It's easy to panic sale when the news is dire but after it dips further it's harder to put money into something that just lost so much so if you want to try this strategy you have to be willing to buy when the world is crumbling to get the up swing in the other side.

I'm good buying when the world is crumbling, it's the when to get out part that I find difficult

But I don't try and time the market nowadays. I do small rebalancing moves but thats about it and thats mostly increasing my bond allocation

I will say in hindsight that target date funds were/are great for 401k slackers. Way back before AI, before 5G, before smart phones, before the internet, before laptops, before digital pagers, getting information was hard. It took effort. Stocks were in the news paper. No link to more info.


Having a caveman that remembered life before fire moment…d8)

I got lucky with a market timing once with a 401k roll over... I had no choice but to sell everything and have the old company mail a check to the new brokerage to deposit and ended up missing out on a 12k draw down.

The next time I had to do I was able to do it electronically and still had to sit out of the market for a day as the money transfered but since it was only a day turn around I just did it 10x chunks so I win some days and lost other days so it all balanced out.

Apparently these systems between brokerages are getting better because it's insane to me someone could save 7 figures in a 401k then miss out on a $50k gain in a roll over bc the money is out of the market for a week when the market is hot.

I only timed the market once, started investing around 2000 for reference.

January 2020 was in Singapore, vividly remember telling my boss in Houston in late January that we were already temperature screening and he laughed at me. That weekend took a trip to Malaysia and were temp screened at the border coming back into Singapore. That following Monday we were notified by our Chinese forge supplier they were shutting down. At that point I decided something was amiss and went all in on safe haven assets/cash. Didn't hit the bottom perfectly but went back in heavy late April. Worked out pretty well but I consider it a once in a lifetime opportunity.

Tormentos said:

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I only timed the market once, started investing around 2000 for reference.

January 2020 was in Singapore, vividly remember telling my boss in Houston in late January that we were already temperature screening and he laughed at me. That weekend took a trip to Malaysia and were temp screened at the border coming back into Singapore. That following Monday we were notified by our Chinese forge supplier they were shutting down. At that point I decided something was amiss and went all in on safe haven assets/cash. Didn't hit the bottom perfectly but went back in heavy late April. Worked out pretty well but I consider it a once in a lifetime opportunity.

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That was the last time I timed.the market. The kicker was when I decided to get back in my 401K provider would not let me move my money, saying I had already used my 6 moves for the quarter and i had to wait till the next quarter. I still made like 7% but nothing like i was goong to make. All I knew was covid was spreading and China was lying


In that same time frame I invested heavily in commodities. I wasn't selling that till much later, after covid as I recall. Before commodities really turned up my wonderful 401K provider decided the commodity fund was going to disappear. Once again I made a little but nothing like it was going to be