Author Topic: Investing in a bull market  (Read 2915 times)

kelp

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Investing in a bull market
« on: May 16, 2018, 06:36:50 PM »
Hey everyone!

I'm new to MMM and investing, and was hoping for some advice on whether or not to buy in to the current market, which sits at a record high.  I am investing diligently through my 401(k), but am currently sitting on a sizable amount of cash that is just wasting away in a money market account.  I'm afraid to go all in with my savings now as opposed to waiting for the next inevitable crash of the market.  I'm 22 and so I know that I have time on my side, but does that still apply if I'm trying to retire in 10-12 years?

thriftycanadian

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Re: Investing in a bull market
« Reply #1 on: May 16, 2018, 06:43:36 PM »
The market hits new highs all the time.  No way of knowing if there is a correction coming soon, but one will come, as they always do.  Just just a matter of when, not if.   If you are that concerned, I suggest going into the market with some allocation to a bond index.  For example: 60% broad based stock index, 40% aggregate bond index.  If there is a correction, you simply rebalance back to this allocation allowing you to buy stocks at the low price.   Kinda like buying them while they are on sale.

Either way, get in the market, it goes up 70% of the time.

maizeman

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Re: Investing in a bull market
« Reply #2 on: May 16, 2018, 07:10:39 PM »
Here are the odds that you'll be better off sitting in cash, bonds, or stocks over different lengths of time (based on Shiller's historical dataset on stocks, bonds, and inflation since 1870):



At anything more than two years, cash is never going to be the best of the three options.

ysette9

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Re: Investing in a bull market
« Reply #3 on: May 16, 2018, 07:46:01 PM »
“Time in the market, not market timing” is how the saying goes.

Equally applicable investing advice: “just keep swimming, just keep swimming”.

Radagast

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Re: Investing in a bull market
« Reply #4 on: May 16, 2018, 08:08:23 PM »
Choose an asset allocation that doesn't suck and get on with it. Using a three fund portfolio, asset allocations that don't suck might include US stocks/International stocks/Bonds:
33/33/33
50/35/15
45/30/25
50/33/17
40/40/20
50/10/40
Or, a four fund portfolio which is all of those +VBR, etc., etc., etc.

Here are the odds that you'll be better off sitting in cash, bonds, or stocks over different lengths of time (based on Shiller's historical dataset on stocks, bonds, and inflation since 1870):



At anything more than two years, cash is never going to be the best of the three options.
Illuvatar, I love that graphic.

DreamFIRE

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Re: Investing in a bull market
« Reply #5 on: May 16, 2018, 08:31:05 PM »
Hey everyone!

I'm new to MMM and investing, and was hoping for some advice on whether or not to buy in to the current market, which sits at a record high.
Record high?  I'm showing the S&P is down just over 5% from the high in January and that the Dow is down nearly 7% from its high.  The correction was around 10%, so as we close in on 4 months since the previous highs, we have a ways to get back to those levels.  Regardless, it pays to keep investing over the long term.

sokoloff

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Re: Investing in a bull market
« Reply #6 on: May 16, 2018, 08:47:18 PM »
Even if you pick the perfectly worst time to invest, you still win over the very long run.

https://www.cnbc.com/2015/08/27/the-inspiring-story-of-the-worst-market-timer-ever.html

pecunia

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Re: Investing in a bull market
« Reply #7 on: May 16, 2018, 08:59:28 PM »
Quote
I am investing diligently through my 401(k), but am currently sitting on a sizable amount of cash that is just wasting away in a money market account.
Quote

The people on this site say over and over again to put your money in index funds.

People say we are due for a crash, but I wonder why?  The big companies are buying back their stocks with their extra tax money.  How long will that last?  Then there are other people who say we have bad housing loans and bad car loans that are causing a sort of a bubble that will burst and drag the whole thing down.  Still other people go on and on that the government debt will cause a crash somehow.  If not government debt than the default on consumer debt will do it.

The price of oil is going up and that hurts some of the economy, but the oil business spends a lot of money on drilling, pipelines and exploration.  This does a bit of the Keynesian thing and pumps the economy up.  It also makes it more economical to use domestic supplies.

Demographics say lots of people will be retiring.  OK, but they can't do that unless they can afford to and this means they are spending money so retirees shouldn't drag the economy down.

So,.....why isn't it a good time to invest?  Why should we expect a crash now,.....just because it's due?  It may be "inevitable."  That word does not mean soon.

kelp

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Re: Investing in a bull market
« Reply #8 on: May 16, 2018, 11:01:08 PM »
Hey everyone!

I'm new to MMM and investing, and was hoping for some advice on whether or not to buy in to the current market, which sits at a record high.
Record high?  I'm showing the S&P is down just over 5% from the high in January and that the Dow is down nearly 7% from its high.  The correction was around 10%, so as we close in on 4 months since the previous highs, we have a ways to get back to those levels.  Regardless, it pays to keep investing over the long term.
Ah, yes.  Good point!

kelp

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Re: Investing in a bull market
« Reply #9 on: May 16, 2018, 11:02:55 PM »
Choose an asset allocation that doesn't suck and get on with it. Using a three fund portfolio, asset allocations that don't suck might include US stocks/International stocks/Bonds:
33/33/33
50/35/15
45/30/25
50/33/17
40/40/20
50/10/40
Or, a four fund portfolio which is all of those +VBR, etc., etc., etc.

Here are the odds that you'll be better off sitting in cash, bonds, or stocks over different lengths of time (based on Shiller's historical dataset on stocks, bonds, and inflation since 1870):



At anything more than two years, cash is never going to be the best of the three options.
Illuvatar, I love that graphic.

Given how low interest rates are currently, would you allocate more than 10% to bonds?  I'm under the impression that the only way for rates to go at this point is up.

Radagast

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Re: Investing in a bull market
« Reply #10 on: May 17, 2018, 12:05:19 AM »
You also just said something similar about stocks being too high and nowhere to go but down. Maizeman showed that cash is not usually that great. Bonds will probably not have high returns, especially over the long term, but they might allay your concerns about a stock crash. All the allocations I recommended spread the bets out pretty well, but there are others that might do it even better. Also, rate fluctuations might cause bonds to move as much in a year as stocks do in a day. Comparatively that's a very tiny deal.

EvenSteven

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Re: Investing in a bull market
« Reply #11 on: May 17, 2018, 07:02:58 AM »
Quote
I'm under the impression that the only way for rates to go at this point is up.

If we include fractions and negative numbers, I can think of many numbers less than 3. Rates can also go sideways. The standard advice is "Don't try to time the market." The standard advice is pretty good.

Spitfire

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Re: Investing in a bull market
« Reply #12 on: May 17, 2018, 08:13:59 AM »
I'm a fan of getting in the market as soon as possible. Yes, there will be a correction at some point, but the market may go up 5%, 10%, 15% from here before it corrects. You would miss those gains and the dividend reinvestments over that time. If you are in it for the long run, the best time to get in is now.

sol

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Re: Investing in a bull market
« Reply #13 on: May 17, 2018, 08:21:30 AM »
Yes, there will be a correction at some point,

That point was February 2018.

Did you blink and miss it?

Spitfire

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Re: Investing in a bull market
« Reply #14 on: May 17, 2018, 08:26:01 AM »
Probably, I don't check the prices very often.

dougules

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Re: Investing in a bull market
« Reply #15 on: May 17, 2018, 11:28:40 AM »
I actually think the market is ahead of itself, too, BUT you should still buy in anyway.  You don't know when and how it will correct itself.  A good example is that the market was really high in 1997, but it kept going higher and never got back down to that level if you were reinvesting dividends.  In the mid-60s it was high, but there was high inflation after that that was not kind to anybody that stayed in cash. 

Another thing to consider is what would you do with the money if you stayed out?  If you just hold cash you'll lose out to inflation.  Bonds aren't very high right now either.  An inflated stock market makes a certain amount of sense when returns are low everywhere else. 

simonsez

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Eric

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Re: Investing in a bull market
« Reply #17 on: May 17, 2018, 04:22:13 PM »
Given how low interest rates are currently, would you allocate more than 10% to bonds?  I'm under the impression that the only way for rates to go at this point is up.

You're not going to be anymore successful at timing the bond market than you will be timing the stock market.  You don't see the contradiction here?  You're worried about stocks because they're at all time highs.  (well, they're not, but close enough).  You're worried about bonds because rates might rise.  Something has to give!  All you're doing is talking yourself into not investing at all.  Investing is a long term game.  Whether rates rise more this year or not is rather inconsequential.  Similarly, whether the stock market performs well or poorly this year is inconsequential.  Pick an asset allocation that works for your risk tolerance and get to it.  Sometimes things go down, and that's okay, because over the long term, you'll make a lot more money by staying invested than trying to jump in and out and at what you "feel" are the right times.

2Birds1Stone

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Re: Investing in a bull market
« Reply #18 on: May 17, 2018, 05:09:24 PM »
Interest rates are no longer "that low". Also, due to the nature of the stock market, it's hitting new highs more often than not.

maizeman

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Re: Investing in a bull market
« Reply #19 on: May 17, 2018, 06:21:19 PM »
To Eric's point I'll add that it makes sense that really low bond yields and really high stock market P/E ratios will coincide. The reason people keep investing in the stock market is that the yields are so low in bonds. And the reason people keep buying bonds (driving down yields) is because the stock market seems so expensive.

The reason people are doing both of those things is that interest rates for cash are so extremely low than even with low yields for bonds and high P/E ratios for stocks, both are still better deals than having money sitting in the bank losing value to inflation even after earning its (pitifully low) interest.

kelp

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Re: Investing in a bull market
« Reply #20 on: May 17, 2018, 06:34:28 PM »
Thanks for the responses everyone!  I'll just get it going and stop making excuses :)

sol

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Re: Investing in a bull market
« Reply #21 on: May 17, 2018, 07:14:16 PM »
The reason people are doing both of those things is that interest rates for cash are so extremely low than even with low yields for bonds and high P/E ratios for stocks, both are still better deals than having money sitting in the bank losing value to inflation even after earning its (pitifully low) interest.

The other reason, in my opinion, is just the increasingly uneven distribution of wealth in America.  If you give me an extra $5k, I'm putting that money straight into my investment accounts because there is nothing I really need.  If you gave it to my sister, she would fix her 20 year old truck, or maybe buy health insurance.  She would spend it promptly, and it would thus go back into the economy. 

At the current moment, income growth is very disproportionately giving more money to people like me, who can't spend it.  We drive up stock prices.  If you were to instead give it to people like my sister, they would spend that money on economic activity and thus presumably drive up corporate profits. 

maizeman

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Re: Investing in a bull market
« Reply #22 on: May 17, 2018, 07:41:05 PM »
You way well be right, Sol.

On the one hand, it sure seems like an awful lot of people are experts at finding ways to completely spend even absurdly high incomes.

On the other hand, I know a lot of studies say that things like increased food stamp or EITC spending has a much more stimulative effect on the economy because you're giving money to people who WILL spend it, while tax cuts provide much less bang for the buck because the wealthy are less likely to go out and spend their surplus income (so presumably they're investing it instead).

sol

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Re: Investing in a bull market
« Reply #23 on: May 17, 2018, 09:39:38 PM »
I think that under your hypo both you and your sister would "spend" the money and it would go back into the economy.

I remain unconvinced that inflating stock prices does a damn thing for the real economy.

Quote
When you put it in your investment account and buy an index fund you would be creating demand for financial assets, and these financial assets companies use to raise capital to expand their business.

If that were true you'd have a stronger case, but when I invest $5k in the stock market I'm not delivering capital to a business so that it can expand, I'm buying dividend rights (shares) from another investor, who presumably bought it from another investor, ad nauseam until at some point in the distant past some investor previously gave capital to a business.  Unless you're investing at the IPO or a new stock issue, you're not supplying capital to a business.  When you buy from Vanguard et al., you're trading on the secondary market for old shares.

Has ANYONE present actually bought stock directly from a company before?  I certainly haven't.

Quote
Perhaps right now there is arguably an over supply of capital driving down investment returns, but this has also had the effect of keeping prices low so it supports consumption.

This is a slightly tricky subject.  Yes, I think there is currently an oversupply of capital, but no, I don't think it is driving down returns.  In a more immediate sense it is driving UP returns, by flooding the secondary market with loose cash and driving up stock prices (which lowers dividends).  Since your returns are a combination of price appreciation and dividends, and dividends are currently small while prices are going through the roof, in this case I think the surplus of capital has improved investment returns in an ugly and precarious positive feedback loop.  Yay capitalism!

We're locally having the same problem with real estate prices.  When loans are easy to get and everyone has spare cash, home prices rapidly outstrip rent increases.  Last year I "made" roughly three times as much on rental property price appreciation (akin to stock price) as I made on positive cash flow from rents (akin to dividends).  The funny money I "made" when home values jumped 20% is exactly the same as the funny money I make when the stock market goes up 20%.  Until you sell, it's not real.  Rents and dividends are real.
« Last Edit: May 17, 2018, 09:41:21 PM by sol »

ILikeDividends

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Re: Investing in a bull market
« Reply #24 on: May 17, 2018, 10:21:36 PM »

Quote
When you put it in your investment account and buy an index fund you would be creating demand for financial assets, and these financial assets companies use to raise capital to expand their business.

If that were true you'd have a stronger case, but when I invest $5k in the stock market I'm not delivering capital to a business so that it can expand, I'm buying dividend rights (shares) from another investor, who presumably bought it from another investor, ad nauseam until at some point in the distant past some investor previously gave capital to a business.  Unless you're investing at the IPO or a new stock issue, you're not supplying capital to a business.  When you buy from Vanguard et al., you're trading on the secondary market for old shares.

You raise a very interesting argument.  But I think you are making an assumption that your $5K investment in stocks will not--either immediately or eventually--be injected into the real economy; just as your sister would have done.  It doesn't have to be a direct investment in an IPO in order to help balance the demand side.

The seller of the stocks you bought might, yes, just reinvest the proceeds; delaying the bulk of the direct effect of your $5K on the real economy.  The seller, however, might just as well pay capital gains taxes and spend the remainder immediately.

So your sister wouldn't have paid capital gains taxes, but I think it's inarguable that any tax money given to the government by the seller is pretty much going to be levered up to spend at least the same amount right away; likely more.

The seller's capital gains taxes* are going to be immediately accounted for, so a portion of your $5K is going right back into the real economy nearly immediately, regardless of the motivation of the seller you bought from.

*I'm not assuming there is no chance of a capital loss incurred by the seller.  I am assuming capital gains are more likely, in the aggregate, than capital losses. Furthermore, not all capital losses can be written off in the same year that they are realized.  So the government essentially gets an interest-free loan on the future value of any carryover losses, with the added bonus of pricing the principal of that interest free loan in today's dollars.  That loan will be repaid with future (presumably inflated) dollars, as the seller writes the losses off; possibly over a period of several years.
« Last Edit: May 17, 2018, 11:24:57 PM by ILikeDividends »

sokoloff

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Re: Investing in a bull market
« Reply #25 on: May 18, 2018, 04:57:20 AM »
If that were true you'd have a stronger case, but when I invest $5k in the stock market I'm not delivering capital to a business so that it can expand, I'm buying dividend rights (shares) from another investor, who presumably bought it from another investor, ad nauseam until at some point in the distant past some investor previously gave capital to a business.  Unless you're investing at the IPO or a new stock issue, you're not supplying capital to a business.  When you buy from Vanguard et al., you're trading on the secondary market for old shares.

Has ANYONE present actually bought stock directly from a company before?  I certainly haven't.
I have and I think many have. I’ve bought allocations in two IPOs, redeemed warrants on another (so a secondary offering), exercised ISOs in 2 startups, NQSOs in 3 companies, and participated in 2 company ESPPs.

Even if you personally never have and every $5K you ever bought went to prior investors, those investors may have been (directly or indirectly via a pension fund or annuity) retirees who will use “your” $5K to live. That money gets just as effectively back into circulation.

pecunia

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Re: Investing in a bull market
« Reply #26 on: May 18, 2018, 06:18:01 AM »
Sol wrote:

Quote
If you give me an extra $5k, I'm putting that money straight into my investment accounts because there is nothing I really need.  If you gave it to my sister, she would fix her 20 year old truck, or maybe buy health insurance.  She would spend it promptly, and it would thus go back into the economy. 

Yeh - Seems like a million people like your sister would be the impetus for a business to expand the truck part business.  I can see a direct help for the economy with that.

L.A.S. wrote:

Quote
I think that under your hypo both you and your sister would "spend" the money and it would go back into the economy.  When you put it in your investment account and buy an index fund you would be creating demand for financial assets, and these financial assets companies use to raise capital to expand their business.

I can understand how a demand for truck parts can be created.  I can understand that if they are made here, it creates jobs and the money stays here. 

I don't think it takes any more people to sell you financial assets whether they are $100K or a $100 million.  Granted the commission  would be a lot nicer.  It really doesn't seem to create any kind of tangible asset that helps anyone.

I guess you guys have already said that.  The government has given rich folks tax breaks for years in the same hope they will invest it and make things better.  They used to have this thing called "trickle down."  It never worked and they don't seem to give up on it.  I think they will keep trying it and change the name to something else.

So,.......Seems like there are a lot of people out there that need things like the truck parts.  Seems like there is a lot of pent up demand.  There also seem to be a lot of low paying jobs out there that will help people satisfy some of this demand.  Unless, there is over speculation in stock prices, maybe the market will be good for a bit and I can depend on getting my 3.8 - 4 percent per year.

Then I can retire and spend some of that 4 percent on repairing MY truck.


CCCA

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Re: Investing in a bull market
« Reply #27 on: May 18, 2018, 04:03:17 PM »
If that were true you'd have a stronger case, but when I invest $5k in the stock market I'm not delivering capital to a business so that it can expand, I'm buying dividend rights (shares) from another investor, who presumably bought it from another investor, ad nauseam until at some point in the distant past some investor previously gave capital to a business.  Unless you're investing at the IPO or a new stock issue, you're not supplying capital to a business.  When you buy from Vanguard et al., you're trading on the secondary market for old shares.

Has ANYONE present actually bought stock directly from a company before?  I certainly haven't.
I have and I think many have. I’ve bought allocations in two IPOs, redeemed warrants on another (so a secondary offering), exercised ISOs in 2 startups, NQSOs in 3 companies, and participated in 2 company ESPPs.

Even if you personally never have and every $5K you ever bought went to prior investors, those investors may have been (directly or indirectly via a pension fund or annuity) retirees who will use “your” $5K to live. That money gets just as effectively back into circulation.


I don't think it's realistic to say that it "just as effectively" gets back into circulation. 
It's clear that extra income for wealthy people is not as stimulative to the economy as extra income to poorer people.  I don't think sol's assertion that giving someone else some capital gains won't in some way boost the economy either.  But it's clear that giving someone living at the edge (or even beyond) of their means an extra dollar, means that extra dollar will most likely be spent immediately, whereas giving the typical investor an extra dollar (especially if its in their retirement account), it is much less likely to be spent immediately.



I quickly found this figure on google image search.  The top 10% of individuals in terms of net worth have 73% of networth, and perhaps even greater percentage of the stock market.  Giving these folks (I asssume I am or am close to being one of these folks) an extra $1000 in capital gains, isn't likely to increase their spending significantly.  It just stays in the brokerage account to be re-invested. 
« Last Edit: May 18, 2018, 04:11:52 PM by CCCA »

sokoloff

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Re: Investing in a bull market
« Reply #28 on: May 18, 2018, 04:26:44 PM »
Even if you personally never have and every $5K you ever bought went to prior investors, those investors may have been (directly or indirectly via a pension fund or annuity) retirees who will use “your” $5K to live. That money gets just as effectively back into circulation.
I don't think it's realistic to say that it "just as effectively" gets back into circulation.
My intention with "that money" was money that went specifically to retirees using their investments or pension to live (a subset of all possible cases).

Your reading of my words is perfectly reasonable (and in retrospect, perhaps the more likely reading), so the communications error is mine.

Telecaster

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Re: Investing in a bull market
« Reply #29 on: May 18, 2018, 05:22:53 PM »

Agreed.  And lets not forget to obvious.   Companies can and do issue new bonds which are bought by investors, and issue more stock at subsequent public offerings which are bought by investors in order to raise fresh debt and equity capital all the time.

Let's not forget the not-so-obvious as well.  A stock share is really just a claim to the future value of the company.   While public stock offerings can benefit companies by raising cash, the company is also giving up the future value.   For that reason, companies typically don't issue more shares than they need to sell to raise a target amount of money.   

So high stock prices can benefit companies because they can give up less future value to raise a given amount of money, but it doesn't follow it leads to them raising more money.   And that's the same reason why many established companies (think AAPL) buy back their stock.   They are deploying cash to buy back future value.   If a company is in a position to buy back, then low prices, not high prices are the most beneficial.

So in theory, if high stock prices help companies raise money, then high stock prices also hurt companies attempting to deploy cash. 

PDXTabs

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Re: Investing in a bull market
« Reply #30 on: May 18, 2018, 09:39:46 PM »
Quote
When you put it in your investment account and buy an index fund you would be creating demand for financial assets, and these financial assets companies use to raise capital to expand their business.

If that were true you'd have a stronger case, but when I invest $5k in the stock market I'm not delivering capital to a business so that it can expand, I'm buying dividend rights (shares) from another investor, who presumably bought it from another investor, ad nauseam until at some point in the distant past some investor previously gave capital to a business.  Unless you're investing at the IPO or a new stock issue, you're not supplying capital to a business.  When you buy from Vanguard et al., you're trading on the secondary market for old shares.

Has ANYONE present actually bought stock directly from a company before?  I certainly haven't.

I'm mostly in agreement with you. I will however point out that when companies give stock to employees they typically will it out of thin air. That is, they issue new shares. You propping the stock value of AAPL up (and if you own an SP 500 index fund you are propping AAPL up) is indirectly paying AAPL engineers.

EDIT - they often turn around an un-dilute their stock by purchasing shares from the open market, but that's a separate story.

MustacheAndaHalf

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Re: Investing in a bull market
« Reply #31 on: May 19, 2018, 12:23:19 AM »
@kelp
If you ignore a savings account, it also hits all time highs every year - because it's growing.  Over the long term, the stock market tends to grow and hit historical highs.  That's normal, but the news needs to make it sound disturbing to get more viewers.

If you're worried about higher interest rates turning into increases in bond yields, you could wait in a short-term bond fund.  The shorter the "duration", the less impact to the fund when bond yields increase.

sol

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Re: Investing in a bull market
« Reply #32 on: May 19, 2018, 08:34:31 AM »
If you're worried about higher interest rates turning into increases in bond yields, you could wait in a short-term bond fund.  The shorter the "duration", the less impact to the fund when bond yields increase.

Since the bond yield curve is flattening anyway, the normal costs associated with this strategy are relatively minimized right now.