financial doomsday... is there some truth to it?

[PencilThinMustache]

I have been doing lots of reading (here, William Berstein, Allan Roth, JLCollins blog) and agree with most of these investing philosophies, sort of a "set it and forget it" mindset that JLCollins speaks of.  I have read the "stock series" and know that at some point in my investing timeline there will be a bear market and I'll lose money; the key is sticking around to see the benefits as the market rises again.  Even as I sit here and read Roth's "How a second grader beat wall street" he keeps talking about "fools" who buy high and sell low.  I don't want to be one of them.  So why should I buy into the market now?  I have been hearing a lot of crap from questionable sources about the market getting primed to take a big crap sometime soon.  I know you cant predict when it will go down the same as you cant predict when it will go up, but from my basic understanding the stocks are currently very "over-priced."  Its been longer than ever since a "correction."  Isnt there a fine line between trying to predict the market (which obviously cant be done) and paying attention to historical trends?

As a recent mustachian convert, I am new to this whole investing game and recently became eligible for my 401k.  Now I still plan to max it out this year (I get a partial match from my company and am in a high tax bracket), but I am worried about putting it all in stocks.  Isnt there some sense to putting it into cash equivalent now (and reaping the tax benefit for participating in 401k) and shifting it over to something else when the market is priced more appropriately? 

appreciate your advice on my situation, and I look forward to this discussion

[Cheddar Stacker]

So why should I buy into the market now?

It depends on your timeline. If you are retiring in a year, maybe buy more bonds than stocks. Otherwise don't worry about it. You will lose more trying to time things than you will lose during a 10% dip.

There are numerous threads related to this topic on the forum. I'm sure people will link some for your reference. There is very little love around here for market timing.

Max out the 401K, but if you're really worried shift a bigger chunk to bonds for a while. If you are retiring in 10 years, the value of the market in 6 months is irrelevant. Any drop is just another buying opportunity. Part of the buy low sell high strategy is to buy. You have to buy to get in, and if it keeps going up you will keep hesitating. Buy now, then buy more tomorrow, then buy more next week/month/year. You'll be fine.

[Patrick A]

Sounds like you have been reading a lot of articles with crappy advice from people who are sure to be proven wrong more than they are proven right.  Best to combat this with more knowledge. 

Read these books, as a start:
The Intelligent Investor (Benjamin Graham)
Common Sense on Mutual Funds (John C. Bogle)

By historical standards, parts of the market may be considered overpriced -- but the market has also been much more expensive relative to earnings & assets at other times.  The market could very well experience a correction soon, but it could also continue to go up for the next 5 years uninterrupted and you would miss out on all of those gains.  Nobody knows what will happen, and nobody has ever been able to reliably predict it multiple times.  Historical trends can not be relied upon as a predictor of future performance.

As Cheddar Stacker said there are many threads touching on this or similar items all over the internet.  Your likely best bet is to always max out the 401k and diversify between stocks and bonds based on your time horizon.  Read some books, educate yourself and make yourself immune to the bullshit!

[Cheddar Stacker]

Here's one thread I started on the subject 2 months ago. Warning, a lot of sarcasm and poking fun so don't take any offense.

http://forum.mrmoneymustache.com/index.php?topic=20089.0

[mulescent]

Lots of good answers already, but I wanted to add one thing to consider.  Look at this chart:

http://goo.gl/jhsWdF

Recognize that it's on a log scale.  Then go back 10+ years from any point in time and see how little the fluctuations (or even big crashes) at the earlier timepoint matter compared to the later one.  Hopefully, you can see that if your time horizon is long it doesn't matter when in a given market cycle you buy.

[PencilThinMustache]

Thanks for for replies thus far, for the record time horizon to retirement is long 20 years (hopefully) but could be 30+ years until Medicare age

[kendallf]

I was just Googling the S&P 500 (I have most of my 401k in an S&P 500 index fund) and came across  this gem http://blogs.barrons.com/stockstowatchtoday/2014/09/22/sp-500-get-ready-for-an-october-surprise/?mod=BOLBlog

As we enter the back half of September we think there has been enough deterioration in the internals, combined with seasonal headwinds, that the risk/reward for equities now favors the downside over the next few weeks.

This may be right or it may be wrong, but it reads like an Onion news story.  Google market valuation, or any index, and you'll get lots of expert articles stating why it's poised to drop...along with lots of expert articles on why it's still headed up. 

Do some reading on the failure of market timing, put your money in, and forget about it for a while. 

[mozar]

My understanding is that before the last recession, stocks, or the p/e ratio was way, way, way more expensive. like 27, and it's 19 right now?
The market is like, always due for a correction according to the media.

i remember sitting in a managerial economics class in the summer 2007 and the professor telling us the stock market was about to collapse.

Since you didn't die during the last recession, I'm sure you'll be OK.

[dividendman]

The way I deal with it is putting 10% of my portfolio in 9 different index funds (IGOV, VDE, VBR, VEU, TIP, VNQ, VWO, EFV, VTI gets 20% allocation).

This way, while it's probably not going to give the best returns, whenever I am adding money and rebalancing (i never sell, i just add money to make it as balanced as possible so i don't incur a tax hit on my non-tax advantaged accounts), it makes me feel like I'm always buying more of the laggard and helps to keep me on track and not shifting strategies.

It's probably better for long term gains to just junk everything in VTI, but I don't think I could do that mentally. I feel like more of a winner with my 9 fund balanced approach. It's not logical but it works for me.

So, right now, international (like VEU) hasn't been performing very well and other funds have, so I'll by less of those and more of VEU and feel good about it. You can follow a similar approach. It's never doomsday everywhere! :)

[wtjbatman]

The facts are that the historical average P/E ratio of the S&P 500 is around 15. It's currently around 21. That means equities are at a premium when comparing them to past valuations. Better stay out of the market, right? Well wouldn't you know but in 1999 the S&P 500 reached a P/E ratio of 44. What if we get there again? Do you want to miss out on that run because some talking head thinks the market is "overvalued"?

The best time to invest is now. Put your money to work for you. Invest in a diversified portfolio of index funds, and sleep well at night.

[Patrick A]

The facts are that the historical average P/E ratio of the S&P 500 is around 15. It's currently around 21. That means equities are at a premium when comparing them to past valuations. Better stay out of the market, right? Well wouldn't you know but in 1999 the S&P 500 reached a P/E ratio of 44. What if we get there again? Do you want to miss out on that run because some talking head thinks the market is "overvalued"?

The best time to invest is now. Put your money to work for you. Invest in a diversified portfolio of index funds, and sleep well at night.

This, exactly this. 

[vagon]

Stocks and stock indexes should be only one component of your asset allocation. Remember to reallocate for a target state and adjust your investments accordingly. Selling to achieve a balance is valid but consider the impact of fees and tax on your return before you do.

No-one can predict the future, so  ignore the pundits and focus on the tactical implementation of the diversified strategy.
a diversified investment strategy is philosophically as well as historically the most sensible thing to do.

[PencilThinMustache]

Wtjbatman--thanks!  It's good to see this type of data. For me at least, this gives a little more reassurance then just blindly trying to ignore the hype.

Dividendman--that is an interesting asset allocation. I will have to look into that some more. Where did you hear about this or did you just come up with that yourself?

So back to my original point, is there nothing, no trend no signal that anyone would use to try to influence them on their asset allocation. In other words once you determine strategy you were sticking to it?

[surfhb]

With a depression, 2 major world wars and countless other social and financial crisis, the market has managed to return around 8%

Now that's  risk I'm willing take.    If In the next 30 years we become stagnant with zero growth then at least I tried.    Having enough money to live in will be the least of your worries in a doomsday scenario anyway :)

[dude]

Even if you buy in "high" right now, you keep a long term perspective, so when (not if) the market drops, you don't panic and sell, thereby avoiding the "sell low" part that kills people.  In fact, if the market corrects enough, you would do well to sink even more money into it (all the while taking advantage of dollar cost averaging) and then just wait out the ride for the next 20+ years, adjusting your allocation annually to one that's suitable for your risk tolerance.

[Jack]

Thanks for for replies thus far, for the record time horizon to retirement is long 20 years (hopefully) but could be 30+ years until Medicare age

Your time horizon is not your retirement date (unless you plan to be all-cash at that point, which is crazy) or your Medicare Social Security age (unless you plan to live on nothing but Social Security). Your real time horizon is your remaining life expectancy.

Once you realize that you'll have 20+ years to ride out market dips even after you retire, you'll see that it makes sense to invest early and often.

[mozar]

I was close right :-)
You have to be prepared for stocks taking a hit of about 50% once or twice more in your lifetime. If it's worse than that then we have bigger problems to deal with. Like rebuilding society. I think we are at the point where we are able to make electricity no matter what. So our watching cat videos can continue unabated forever.

[RapmasterD]

The people who posed similar questions on this forum have lost out on some nice gains. Stop reading articles, particularly on Yahoo! Finance and CNBC. Turn off your TV,  particularly CNBC.  Nobody has a crystal ball.