Current market has me scared to invest

[Homebrewer]

All,

I'm a 29 year old with $146,000 of cash, making up 30% of my net worth and am trying to figure out how I should invest it. I don't believe in trying to time the market, however in direct contrast to not believing in timing the market, the quick rise in stock prices over the last few months has me nervous to just dump all of it into an S&P 500 fund today. I would appreciate any advice on where to invest.

Current assets and asset allocation:
Large Cap Bank Stocks         $26,715   5%
Dividend Index Funds         $81,875   16%
Real Estate Index Fund          $63,384   12%
Total Market Index Fund         $57,507   11%
Cash                  $145,571   29%
401K (total market index fund)   $50,042   10%
Home Equity               $83,711   16%
Total                  $508,805   

[matchewed]

http://forum.mrmoneymustache.com/investor-alley/is-the-stock-market-too-expensive-to-get-back-in/
http://forum.mrmoneymustache.com/investor-alley/a-crash-is-coming/
http://forum.mrmoneymustache.com/investor-alley/%27but-right-now-the-market-is-at-an-all-time-high-%27/
http://forum.mrmoneymustache.com/investor-alley/market-bubble-should-i-make-a-move-now/
http://forum.mrmoneymustache.com/investor-alley/new-%27the-sky-is-about-to-fall%27-stock-chart/

Have an Investment Policy Statement. Develop an asset allocation that let's you sleep at night and invest accordingly.

[hodedofome]

These weekly threads of the market is too high/the top is near makes me wonder just how much longer this bull market will actually run. It won't stop until everyone finally buys in I guess. Makes me feel a little better about my pyramid buy in Restoration Hardware today...

[brewer12345]

These weekly threads of the market is too high/the top is near makes me wonder just how much longer this bull market will actually run. It won't stop until everyone finally buys in I guess. Makes me feel a little better about my pyramid buy in Restoration Hardware today...

I love seeing threads like this.  When I start getting stock tips from people who are not investors I will buy puts.

[foobar]

These weekly threads of the market is too high/the top is near makes me wonder just how much longer this bull market will actually run. It won't stop until everyone finally buys in I guess. Makes me feel a little better about my pyramid buy in Restoration Hardware today...

It is a lot more worrying when everyone starts posting that their is no need for bonds just go 100% stock. :)

[hodedofome]

It is a lot more worrying when everyone starts posting that their is no need for bonds just go 100% stock. :)

Oh gosh that's over half of the people on this website. JCollins (whoever the heck this guy is) = God according most here.

Full disclosure: My retirement accounts are currently 100% stocks but I'm certainly not a buy and holder.

[RyanHesson]

I'm no market expert so don't take trust this absolutely, but I would be the type to try to time the market. Everyone else thinks it's dumb, it's okay. I'll do things my way and they'll do it their way. But for right now, I don't see any imminent crash coming. P/E ratios are pretty high but they're not necessarily to bubble levels.

[mxt0133]

P/E ratios are pretty high but they're not necessarily to bubble levels.

The thing about P/E ratios is that when earnings drop as they did in 2009 P/E ratios actually shot up while the prices were dropping.  That's because the denominator E was dropping faster than the numerator P.  I'm not discrediting the value of looking at P/E ratio but remember most institutional investors do not look at current earnings but future earnings.

[libertarian4321]

Not to worry.

Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.* **





* - though I could be wrong...
** - I should probably credit Mr. Irving Fisher for this classic nugget of wisdom

[Scandium]

Since "everyone" now think the market is a bubble/inflated/frothy etc doesn't that mean we're not? Wouldn't the drop and/or lower future returns be priced in already? The Market isn't some disparate entity that just does stuff, it's all of these people. The people that now all say stocks are too expensive..

[GGNoob]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

[milesdividendmd]

Just because the american stock market (particularly dividend stocks and small caps) have high valuations right now does not mean that all stocks are overvalued.

If you want to buy when stocks when they are cheap, feel free to invest in ETFs tracking Ireland, Russia, Greece, Austria and Italy.  (That is what cheap stocks look like in real time.)

Personally, I would recommend investing in a broadly diversified portfolio of cheap passively managed ETFs and mutual funds that reflect your own specific appetite for risk, and rebalancing once a year though.  (Trite but effective.)

Market timing is a low probability play.

[dcheesi]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

[Scandium]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

[Roland of Gilead]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

Except the market goes up like an escalator and goes down like an elevator with a broken cable.  DCA is like taking the stairs.

[Scandium]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

Except the market goes up like an escalator and goes down like an elevator with a broken cable.  DCA is like taking the stairs.

so? The market could crash the day after your last DCA input. Then you lost out on much of the gains, and still loose your portfolio value!

DCA is trading returns for (IMO: false) psychological comfort. That's fine, as long as the person doing it is aware of the trade-off and accept it.

[milesdividendmd]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

Except the market goes up like an escalator and goes down like an elevator with a broken cable.  DCA is like taking the stairs.

so? The market could crash the day after your last DCA input. Then you lost out on much of the gains, and still loose your portfolio value!

DCA is trading returns for (IMO: false) psychological comfort. That's fine, as long as the person doing it is aware of the trade off and accept it.

I agree with this 100%.

DCA is a useful strategy from a psychological perspective, and there is no shame and not much harm in using it as an entrance strategy. But it is likely to cost you money more times than not.

I think DCA would make a lot of sense for the OP.

If you want to try to improve your returns based on valuations then you are talking about market timing or tactical asset allocation.  This means increasing your stock exposure at low market valuations, and decreasing your exposure at high market valuations.  Or shifting your stocks to under valued markets on a regular pre-determined basis.

[GGNoob]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

Except the market goes up like an escalator and goes down like an elevator with a broken cable.  DCA is like taking the stairs.

so? The market could crash the day after your last DCA input. Then you lost out on much of the gains, and still loose your portfolio value!

DCA is trading returns for (IMO: false) psychological comfort. That's fine, as long as the person doing it is aware of the trade off and accept it.

In this case, I think DCA will just make the OP feel much more comfortable investing when he may otherwise want to keep the money in cash. So DCAing would be much better than just letting it sit in cash and trying to time the market.

[This_Is_My_Username]

easy solution.

you are young, so you can be more agressive than average. 

take all the cash and invest it in pretty much anything. 

The return will be greater than the shitty 1% you are getting on cash in the US. 

take a teaspoon of concrete. 

[ender]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

Except the market goes up like an escalator and goes down like an elevator with a broken cable.  DCA is like taking the stairs.

The fundamental premise of investing in the stock market is that it has expected returns which are good (let's say 8%).

Because of this, if you have money you could and ultimately will invest, you should always invest it in the market immediately if your alternatives are returning .1% or whatever savings accounts return.

The only situation where DCA starts making much sense is if you are investing large sums (relative to your net worth) because then the risk of a larger loss can be worth paying an effective insurance against by spreading the investment out over a longer period of time.

[Kaspian]

365 days ago people were saying the market was too high and they were scared to buy in.  What growth have they lost out on if they didn't do it?  20% returns?  30%?  You can't know these things.  Make a balanced portfolio plan, execute it, ignore it, then rebalance when necessary.

[Scandium]

Why not just dollar cost average into the market? Open up an account at Vanguard (or wherever) and transfer an equal amount every so often (every week, every month, or whatever you choose) into your account and invest it.

This! When I was first looking at opening an index fund account, I was paralyzed by the fear of the worst-case scenario ("what if I invest today and the market crashes tomorrow?!?!11?"). Doing it this way relieves you of the psychological burden of timing your entry into the market, since you're easing into it one toe at a time.

Just note that this also gives you a lower return. Simply; the market goes up 2/3 of the time, therefore DCA will earn you less 2/3 of the time.

Except the market goes up like an escalator and goes down like an elevator with a broken cable.  DCA is like taking the stairs.

so? The market could crash the day after your last DCA input. Then you lost out on much of the gains, and still loose your portfolio value!

DCA is trading returns for (IMO: false) psychological comfort. That's fine, as long as the person doing it is aware of the trade off and accept it.

In this case, I think DCA will just make the OP feel much more comfortable investing when he may otherwise want to keep the money in cash. So DCAing would be much better than just letting it sit in cash and trying to time the market.

I guess. I just prefer to overcome psychological barriers with reason and  fact, rather than working around them with false security.

And just to be clear; I had the same issue. I got an extra $30k to invest. I think the market is high. But I researched the facts and dumped it in. (Funny enough the market dropped 2% the next week, but it's back up now..)

[Radagast]

Bernstein suggests "Value Averaging" for a case like this. Choose a number such that you will be fully invested after a short number of years, ideally planned to include a possible crash.

As an example, this would mean saying "My stocks will rise in value $10,000 every month".

If your investments for the first month are level, you invest 10,000 of the cash. The next month, they are down and you lose 2,000 so you must invest 12,000. The 3rd month they are up 4,000 so you need only invest 6,000. The 4th month they are way up by 11,000, so you must withdraw 1,000. The 5th month they are way down by 15,000, so you will invest 25,000.

As you can see, this will likely give better results than DCA.

[WillPen]

Value Averaging can also be used to meet some growth goal -- Say 3% per quarter or 12% annually.

For the quarters that your investment doesn't earn 3%, you buy enough shares to make up that difference. If your investment makes more than 3%, you sell the excess shares to bring you down to a 3% gain and keep the cash handy until its time to buy again. Sort of like buying low and selling high.

I haven't tried it but I'm interested.

[Radagast]

Value Averaging can also be used to meet some growth goal -- Say 3% per quarter or 12% annually

I like the % version even better.

[sublime9528]

I don't believe in trying to time the market, however in direct contrast to not believing in timing the market, the quick rise in stock prices over the last few months has me nervous to just dump all of it into an S&P 500 fund today.

As has been said, there are other places you can invest this money to minimize the risk of a US market downturn.  Bonds, real estate, foreign equity, etc etc.    Looks like you have real estate covered, so a short term bond fund (https://personal.vanguard.com/us/funds/snapshot?FundId=0539&FundIntExt=INT) and foreign equity (https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT#tab=0) could be good choices.

More generally, regarding the fear of getting into a market right before a downturn, I initially had the same fears as you do.  A way to think about it that helped me is to remember that this is just another form of market timing.  Are you getting in right before a downturn?  How long will you wait for that downturn before buying in?  Or what about buying cheap stocks during a downturn?  How will you ever know that they're really at their cheapest and that you're getting the best deal?  They could plummet an additional 30% tomorrow, or shoot up 30%.  How long are you willing to wait for a market downturn before you just bite the bullet and invest the money?  A week?  A month?  A year?

The two solutions to this problem as I see it are (1) buy assets that are generally poorly correlated with the S&P, as mentioned above and (2) recognize that if you're aiming for a long term investment horizon in stocks, then a bear market could be your best friend.  That allows you to spend years buying up cheap stocks.  Even if you have bad luck timing and put in your money right before a downturn, in the long haul you are extremely likely to make it all back plus some. 

[Kaspian]

Here is another way to think of it:

If you suddenly inherited a portfolio worth $146,000 would you cash it all out today?  Probably no, right?  But why not?  It's the same as the $146,000 in cash you have.  Would you be scared of losing on the portfolio?  And now you're scared of losing on the cash?  You can't have it both ways. 

Changing your mindset about money, removing all emotion, and seeing it as numbers is probably a sure fire way to early retirement.  :)

The following is the best article I think I've ever read about emotions versus money.  It changed the way I see everything!

http://www.moneysense.ca/invest/train-your-investing-brain

[clarkfan1979]

I love the fact that emotions play such a large role in this decision. I think this illustrates the point that the stock market consists of a lot of emotions from a lot of people. If you can master understanding emotions, you can do well in the stock market. The last part is paraphrased from Warren Buffet.

[Eric]

The following is the best article I think I've ever read about emotions versus money.  It changed the way I see everything!

http://www.moneysense.ca/invest/train-your-investing-brain

Good article!  Thanks for sharing.

[daverobev]

I'll admit to being concerned right now. I'm selling a house that is maybe 70% of my NW, and I plan to invest that money.

I have a reasonable asset alloc plan.

But the current yields on the ETFs I want are ~2.3%. I don't want to have to sell incrementally to live, and I need about 3% yield not to have to.

I might take a chunk and buy another house (in the US; the one I'm selling is in the UK).

Scary stuff, but I know I need to just bite the bullet. Maybe keep a year or two in cash. Value averaging sounds good actually. Invest 2/3 or 3/4 and then do a 1% a month target... but reinvest divis and let increases ride? Hmm.

[dragoncar]

I'll admit to being concerned right now. I'm selling a house that is maybe 70% of my NW, and I plan to invest that money.

I have a reasonable asset alloc plan.

But the current yields on the ETFs I want are ~2.3%. I don't want to have to sell incrementally to live, and I need about 3% yield not to have to.

I might take a chunk and buy another house (in the US; the one I'm selling is in the UK).

Scary stuff, but I know I need to just bite the bullet. Maybe keep a year or two in cash. Value averaging sounds good actually. Invest 2/3 or 3/4 and then do a 1% a month target... but reinvest divis and let increases ride? Hmm.

I might suggest VWINX or a broad-based dividend yield ETF.  Just because the typical bogleheads AA is mostly S&P500 doesn't mean your AA has to be that. 

[davef]

Since you already have significant market investments (for your age) have you considered investing the money in something else entirely to diversify? A rental property, your own business, or paying off your house are 3 options that would be resistant to a market crash.

[daverobev]

I'll admit to being concerned right now. I'm selling a house that is maybe 70% of my NW, and I plan to invest that money.

I have a reasonable asset alloc plan.

But the current yields on the ETFs I want are ~2.3%. I don't want to have to sell incrementally to live, and I need about 3% yield not to have to.

I might take a chunk and buy another house (in the US; the one I'm selling is in the UK).

Scary stuff, but I know I need to just bite the bullet. Maybe keep a year or two in cash. Value averaging sounds good actually. Invest 2/3 or 3/4 and then do a 1% a month target... but reinvest divis and let increases ride? Hmm.

I might suggest VWINX or a broad-based dividend yield ETF.  Just because the typical bogleheads AA is mostly S&P500 doesn't mean your AA has to be that.

I actually have 0% American ;) I'm in Canada. Only US thing I have is a house.

There are some Canadian divi ETFs but honestly the market is so small/concentrated...

And I totally get... Buffet, 'more wealth lost chasing yield', etc.

I'll... not sure. DCA maybe, partially, but certainly put 50% straight in. Probably more.

[dragoncar]

I'll admit to being concerned right now. I'm selling a house that is maybe 70% of my NW, and I plan to invest that money.

I have a reasonable asset alloc plan.

But the current yields on the ETFs I want are ~2.3%. I don't want to have to sell incrementally to live, and I need about 3% yield not to have to.

I might take a chunk and buy another house (in the US; the one I'm selling is in the UK).

Scary stuff, but I know I need to just bite the bullet. Maybe keep a year or two in cash. Value averaging sounds good actually. Invest 2/3 or 3/4 and then do a 1% a month target... but reinvest divis and let increases ride? Hmm.

I might suggest VWINX or a broad-based dividend yield ETF.  Just because the typical bogleheads AA is mostly S&P500 doesn't mean your AA has to be that.

I actually have 0% American ;) I'm in Canada. Only US thing I have is a house.

There are some Canadian divi ETFs but honestly the market is so small/concentrated...

And I totally get... Buffet, 'more wealth lost chasing yield', etc.

I'll... not sure. DCA maybe, partially, but certainly put 50% straight in. Probably more.

Oops, I should have read more carefully.  It looks like the ETFs you "want" don't give you the yield you "need."  Perhaps you should "want" different ETFs with a higher yield.  That's all I was trying to say.

[daverobev]

Oops, I should have read more carefully.  It looks like the ETFs you "want" don't give you the yield you "need."  Perhaps you should "want" different ETFs with a higher yield.  That's all I was trying to say.

Sure - but I (logically) know I'm better off just accepting the low yield and selling ~1% until the yield covers me. The ETFs I (my asset alloc) tells me to buy are the lowest MER, most diversified, etc.

Logic vs emotions, eh.