Author Topic: Investing over the matched 401K contribution in a Bubble looking Stock Market  (Read 4514 times)

lamachin007

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The Stock Market is pretty high right now, I currently put away 6% ,since that's how much my employer matches, I would to do more but I am worried about basically buying stocks at bubble like prices. What percentage if any should i contribute over 6 % ?

I would try to Max out the 401K up to $18000 if the stock market was normal or low, but at high levels it just doesn't seem like a good idea,

Please advice,

Best Regards,

With This Herring

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Putting more into your 401(k) still decreases the amount of taxes you will pay this year.  Where else would you put the money?  Most of this forum would shudder if they found you were leaving it in cash in some overly-full checking account instead of taking advantage of tax-advantaged space and at least pulling dividends.  (Of course, if you have high-interest rate debt, you should pay that down, but my advice is based on the assumption that you don't have such debt.)

MDM

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You'll probably still be better than Bob.  Good luck!

cschx

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Still worth it just for the tax savings. Of course it depends on what's available in your plan, but I think just about every plan has some kind of cash-like option (usually a money market account).

This is my second year maxing out my plans at 2x 18k (403 + 457), plus employer contributions. I'm currently all in cash, for moral reasons. I paid zero taxes last year and went from ~60% to ~80% savings rate on the same budget. Allocation often trips people up with decision paralysis, so remember you can always allocate later.

Jack

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The Stock Market is pretty high right now

Is it? I don't know that, and I very much doubt that you do either unless you're a time traveler from the future.

dividendman

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The stock market has also been "pretty high" through most of the below. So when would you have invested? The answer? Right now.

1900 - Italy's king is assasinated
1901 - Queen Victoria dies, President McKinley is assassinated
1903 - plague in India and China, killing over 12 million pepole
1904 - Russia and Japan go to war
1905 - Russia has a bloody revolution
1906 - San Francisco burns down
1908 - a massive explosion mysteriously happens in Russia, leveling 830 square miles. Truks revolt in the Ottoman empire, a massive earthquake in Italy kills 150 thousand people
1909 - Japan's prince is assasinated
1911 - The Chinese bloody revolution
1912 - the Titanic Sinks
1913 - person income tax introduced in the US
1914 - WWI starts
1915 - WWI still going, millions dying, Armenian genocide is going on
1916 - yep, WWI still going, tanks and chemical weapons being used, airplanes for dropping bombs
1917 - another russian revolution, this time to communism, WWI still going and the US joins in
1918 - WWI still going, but who cares, the Spanish flu kills 100 MILLION people, 5% of the world's population
1919 - WWI finally ends, spanish flu still killing though
1920 - another plague in India, US outlaws alcohol
1921 - german hyper inflation going on, the Irish declare independence
1922 - some guy named Mussolini takes over Italy
1923 - some dude named Hitler has a failed coup in germany - woo, the world lucked out
1929 - the great depression starts
1930 - Stalin starts killing people all over the place, great depression
1931 - yup, still in the depression
1932 - still there, nothing is getting better
1933 - still depressed, and this time Hitler takes over germany
1934 - The dust bowl starts peaking... i.e. a decade of drought, no crops, everyone starving, this keeps going until 1939!
1935 - dangerous communist social program started in the US (Social Security)
1936 - spanish civil war begins, stalin ramps up his killings into the millions
1937 - Japan invades china
1938 - Hitler annexes Austria, at least he's stopping there
1939 - whoops, maybe, not WWII starts... millions killed, trillions infrastructure wiped out in Europe and across the world
1940 - Nazi's start murdering millions of civilian "undesirables", FDR takes 3rd term ignoring Washington's precedent
1941 - Japan bombs pearl harbor, world still f'd up in a huge war, Vietnam turns communist
1942 - is the warover? nope, just ramping up, millions more dying
1943 - everyone is still dying in WW2
1945 - woohoo, WWII is over, oh wait, that happened by droping devastating indiscrimate nuclear radiation bombs on civilians! oh, and FDR died in office
1946 - peace in our time! except the USSR annexes half of europe, which is a pile of rubble thanks to carpet bombing
1947 - India and Pakistan gain independence from Great Britian, and then go to war against each other
1948 - Israel founded, that won't cause any problems. Ghandi gets assassinated
1949 - China becomes communist, USSR, the nemesis of hte free world, gains nuclear weapons
1950 - whoops, another devastating total war, this time in Korea, but not between Koreans, a proxy war between the US/Russia/China and others
1952 - we get a polio vaccine... wait what? Oh yeah, people were getting f'd up by polio for the last forever years
1954 - segration is ruled illegal in the US, so race relations are finally fixed
1955 - Warsaw pact created, basically a bunch of countries banded together to defeat america/western capitalist democracies
1956 - Hungarian revoltion, Suez crisis
1957 - Russians beat everyone into space
1960 - a 9.6 magnitude earthquake, the biggest ever recorded hits chili, lots of people die, civil rights riots and protests start happening
1961 - US backed rebels unsuccessfully invade Cuba, Berlin wall goes up, more civil rights disruptions, Soviets get the first man in space, Tsar Bomba, the largest nuclear weapon ever denoted is denoted, we can now destroy the world
1962 - Now that we have the bombs to blow up the world, the Cuban missle crisis happens, which almost blows up the word
1963 - another president killed in office
1964 - civil rights act passed, ok, now race relations are good for sure, no more civil rights disruptions ever
1965 - US sends a few troops to Vietnam just in case, Malcom X is assassinated, India and Pakistan go to war again
1966 - Chairman Mao has a cultural revoltion in china, lots die, the US institutes the draft
1967 - the Australian PM disappears, the six day war between Israel and it's neighbours happens, civil rights unrest continues
1968 - MLK Jr. assassinated, RFK assasinated, Tet Offensive in Vietnam happens, yeah, the Vietnam war is going full speed ahead
1971 - the US capitalist system institues wage and price controls, India and Pakistan go to war again
1972 - Vietnam war still going on
1973 - US declares victory and leaves vietnam, the US can't get oil because of an embargo
1974 - the US president up and quits
1975 - big Cambodian genocide, Civil war in lebanon, the US president escapes two assassination attempts
1976 - Tangshan earthquake kills a quarter million folks, Vietnam is all communist now
1979 - Iranian revolution, a US nuclear reactor has a partial meltdown
1980 - mount st helens erupts, the US embargoes the USSR, US inflation hits 14%, Iran Iraq war starts, and goes on for 8 years
1981 - someone tries to kill the US president, again
1982 - Falkands war starts, Lebanon war starts
1983 - US embassy bombed, a bunch of coups happening, USSR downs a korean airliner, famin in ethiopia kills half million
1984 - India's PM assassinated
1986 - Russian nuclear reactor melts down
1987 - black monday in US markets
1989 - berlin wall falls, USSR breaking up
1990 - Persian gulf war, Germany reunites, US doing more coupy type things in south ameria
1991 - USSR officially collapses, Balkans war starts, bosian genocide starts
1994 - massive genocide in rwanda
1995 - Sarin gas is used in a Tokyo subway, Rabin assassinated
1996 - mad cow disease
1998 - india and pakistan test nukes
1999 - India and pakistan go to war and they have nukes
2000 - .com bust
2001 - 9/11
and you know the rest

Proud Foot

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Yes the stock market might be high, but is it really a bubble?  And why do you think it looks like a bubble?  And to add to what Dividendman said, in the 16,798 days since January 3, 1950 the S&P500 has been within 10% of the high all but 6,377 days (38%) with the two longest stretches being 1,472 days (dotcom/9-11) and 1,461 days (late 70's). If that were to happen again the combination of reinvesting dividends and continual contributions at lower prices will boost your returns once the market recovers.

As far as contributing to your 401k, most plans have a stable value or money market fund you can have your contributions put into if you really don't want them in the stock market.  And any contributions above the match still have an immediate "return" of your marginal tax rate.

Spork

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Worst case scenario:  You up your contributions.  It is a bubble it pops.  Now instead of buying 10 shares at $100, you're buying 20 shares at $50.  Oh noes!

I understand the trepidation people feel putting in a large lump sum (even though it's statistically better to do so.)  But if you're buying small amounts every week or two... you're dollar cost averaging by definition.  If the bubble bursts, it's like you're buying it with a coupon.

FB2020

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Why do you have to invest in stocks directly? You can start investing in money markets funds for now, at least you'll get the tax savings.

And if/when you get some drop in stocks and feel its not bubble, you can move into stocks within your 401K.

lamachin007

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Thank you everyone, I will max out the 401k, I intend to live another 50 + years :D

No debt, and don't know what to do with all the cash sitting in the bank  ;)

JJ-

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Thank you everyone, I will max out the 401k, I intend to live another 50 + years :D

No debt, and don't know what to do with all the cash sitting in the bank  ;)

Huzzah!

moof

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Thank you everyone, I will max out the 401k, I intend to live another 50 + years :D

No debt, and don't know what to do with all the cash sitting in the bank  ;)
Bond fund if you are nervous, VTSAX if you have a long term view.  Next question?

lamachin007

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Thank you everyone , and happy new year !

fattest_foot

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Let's say the market is overpriced.

We'll use VTSAX since it's so popular. You can buy today at $56/share. Or you can wait and hope that it falls to maybe $40/share (30% drop).

In 30-40 years when you're finally selling off the shares you bought, VTSAX may be trading at 400 or 500. Does that extra $16 a share really matter much anymore?

Stop thinking short term.

sokoloff

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Let's say the market is overpriced.

We'll use VTSAX since it's so popular. You can buy today at $56/share. Or you can wait and hope that it falls to maybe $40/share (30% drop).

In 30-40 years when you're finally selling off the shares you bought, VTSAX may be trading at 400 or 500. Does that extra $16 a share really matter much anymore?

Stop thinking short term.
I agree with your last sentence sentiment, but the issue is not the $16/share, but rather the 30% more shares that you could have post-bubble-pop. The extra $400 or $500 times the extra ~286 shares you could buy with $8K is the issue.

seattlecyclone

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Right, if you can reliably time a market drop, investing before that is stupid. However you can't reliably time a market drop. If you could, you would be a billionaire already. There is no guarantee that the market will ever be priced any lower than today. What if we run the price of VTSAX up to $80 before a correction that brings it back down to $60. You'll be kicking yourself for not buying at $56.

moof

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Right, if you can reliably time a market drop, investing before that is stupid. However you can't reliably time a market drop. If you could, you would be a billionaire already. There is no guarantee that the market will ever be priced any lower than today. What if we run the price of VTSAX up to $80 before a correction that brings it back down to $60. You'll be kicking yourself for not buying at $56.

And if you REALLY think you are smarter than the rest of the market, go buy a TON of the negative triple leveraged S&P500 fund and cash in when the market crashes.  All 401k's have a money market option that will get you zero growth, so you can always park it there if you are nervous.

A friend of mine has $200k in CD's because he cashed out an old 401k in fear about 15 years ago.  I pointed out to him that by putting it in something "safe" has has lost at least 200k of growth had he just parked it into a broad stock fund (VTSAX has gone up 160%, his CD's maybe 30%?).

The reality is not that you will lose out of the 30%, but rather that you might lose out on 30% of a percent or two of your portfolio at most, such that in 20-50 years you'll never notice, other years you will be luck and be buying through the bottom of a trough.  Setting up regular investments and leaving it all alone cuts out all this anxiety.

I don't bat an eye shoving a spare grand or two into my taxable if I determine it is spare.  The faster it is out of sight the less likely it will get invested in heavily depreciating ice cream and beer.  Mmmm...  Beer...

I recently read an article (can't find it now) that investigated dollar cost averaging strategies.  The scenario was what best to do with a large 500k inheritance, and how to put it into the market.  The conclusion that that spreading it out over 1 year, or 2 years, or 5 years with monthly investments was historically worse than just immediately shoving 100% into the market.
« Last Edit: December 30, 2016, 03:06:53 PM by moof »

JLee

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If the market wasn't routinely at a high...why exactly would we invest in it?  We invest in the market because it goes up over time.

gj83

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Investing over the matched 401K contribution in a Bubble looking Stock Market
« Reply #18 on: December 30, 2016, 01:04:27 PM »
With most 401k plans you benefit from dollar cost averaging.  So if you're paid twice a month and the money is deposited twice a month that means that you'll purchase on some good days, you'll purchase on some bad days...but you'll be in the market.  Savings rate trumps timing the market and time in the market beats timing the market.
I sold a house 2 years ago during that year's peak of the stock market.  I maxed out my Roth as a lump sum with those proceeds.  I only know it was a peak in hindsight.  My 401k with consistent contributions had better returns for last year thanks to DCA.  In a couple years, because I stay the course and keep contributing to both, it will be a wash. 

So if we're at a peak and then pull back a bit like February of this year will you keep contributing?  I do put a bit more in if I can during pull backs.  I have the end game in mind and I trust that the market will go up by the time I need the money.


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« Last Edit: December 30, 2016, 01:10:51 PM by gj83 »

JLee

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With most 401k plans you should get dollar cost averaging.  So if you're paid twice a month and the money is deposited twice a month that means that you'll purchase on some good days, you'll purchase on some bad days...but you'll be in the market.  Savings rate trumps timing the market.
I sold a house 2 years ago during that year's peak of the market.  I still maxed out my Roth as a lump sum.  I only know it was a peak in hindsight.  My 401k with consistent contributions had better returns for last year thanks to DCA. 


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Lump sum typically beats DCA, too.  I'll max my Roth IRA on Jan 1, just to get the money in the market as quickly as possible.