Gloom and Doom

[larman]

Hello All,

I have allowed my fear of a economy collapse to limit my investing.  I have a 401k in a fixed account earning 3.5%.  This was done after 2008 and since then the market has almost tripled in value.  I have been trying to time when to get back in but have not found the right time.  I do not know what to do?  I see the fed printing money and it scares the hell out of me. Any suggestions?

[Retire-Canada]

Any suggestions?

Start buying stocks today and keep buying them.

When the next correction happens buy some more on sale!

I just bought double my typical monthly allocation a couple days ago. I'll be buying more next month and the month after that.

As much as 2008 sucked it was a great lesson for an aspiring FIRE/MMM-investor.

-- Vik

[Cromacster]

As the ancient chinese proverbs says

The best time a plant a tree was 20 years ago.  The second best time is now.

And turn off the news channel.

[patricles]

As the ancient chinese proverbs says

The best time a plant a tree was 20 years ago.  The second best time is now.

And turn off the news channel.

I'm with Cromacster.  Turn on the news and any given day there will be a dozen stories that could affect the economy, half bad and half good (although knowing the news probably more bad than good).

Nobody on these forums knows how and when these things will impact the stock market.  I just take confidence knowing that when I put money in VTSAX I'm actually becoming an owner in thousands of companies where people work hard to create value, no matter what the economy is doing outside their window.

[Vertical Mode]

The Fed printing money is a big reason to start investing more aggressively. Your 3.5% return will be eroded substantially by inflation. You might even say you can't afford NOT to invest.

Financial advisor Ric Edelman has some good thoughts about "timing the market":

https://books.google.com/books?id=-YotqRsP21kC&pg=PA252&lpg=PA252&dq=ric+edelman+timing+market&source=bl&ots=K0FO3xeh-m&sig=Pl606aVC3kzGkebiLkZIbUs0zxk&hl=en&sa=X&ei=kcj5VP_2CriSsQTvnYKYAw&ved=0CEQQ6AEwBTgK#v=onepage&q=ric%20edelman%20timing%20market&f=false

The TL;DR version is, timing the market is essentially impossible, and in his opinion (and mine, FWIW) not worth trying. I agree with everything previous posters have said up-thread.

What is your time horizon for which you plan to keep the money invested? If you anticipate a short-term need for the money, a 3.5% fixed account might not be so bad - if you plan to leave it invested for the foreseeable future, a more aggressive (I.E. more stocks) approach would help maximize your returns. If you're looking to put money in the stock market, watch the expense ratios to be sure that you're lining your own pockets and not the pockets of some fund manager somewhere. Without more information on your exact situation, it's hard to offer any more specific input that would be worth much.

Most importantly, don't beat yourself up for being too conservative. Loss aversion is one of the most common barriers preventing people from investing in the stock market, and many people I know have fallen into that same trap for fear of their principal investment decreasing. The fact that you have (and are presumably contributing to) a 401k suggests you are already doing better than most. Once you're sure you're comfortable investing your assets, there are some folks much savvier than myself around here that can offer more specific guidance.

Best of luck!

[Retire-Canada]

Also, think of a down economy as discounted stocks next time and buy more if possible.  :)

Not to be argumentative, but suggesting the OP buy more equities when the market is down because they are discounted contradicts your advice to decide on an asset allocation and sticking with it.

If you believe stocks are on sale and buy more than your asset allocation indicates you should you are by definition timing the market.

-- Vik

[patricles]

Also, think of a down economy as discounted stocks next time and buy more if possible.  :)

Not to be argumentative, but suggesting the OP buy more equities when the market is down because they are discounted contradicts your advice to decide on an asset allocation and sticking with it.

If you believe stocks are on sale and buy more than your asset allocation indicates you should you are by definition timing the market.

-- Vik

Well if you establish an asset allocation and stocks then go down then they will be a lower percentage of your portfolio than your asset allocation intended (unless every other asset class you own goes down in an equal proportion).

[Retire-Canada]

Well if you establish an asset allocation and stocks then go down then they will be a lower percentage of your portfolio than your asset allocation intended (unless every other asset class you own goes down in an equal proportion).

Yes. That's normal rebalancing which is part of maintaining an asset allocation.

Buying more stocks when they are on sale if you have extra funds [which was the suggestion above] is not part of maintaining an asset allocation strategy and is essentially trying to use market timing to generate extra returns.

-- Vik

[Mississippi Mudstache]

Well if you establish an asset allocation and stocks then go down then they will be a lower percentage of your portfolio than your asset allocation intended (unless every other asset class you own goes down in an equal proportion).

Yes. That's normal rebalancing which is part of maintaining an asset allocation.

Buying more stocks when they are on sale if you have extra funds [which was the suggestion above] is not part of maintaining an asset allocation strategy and is essentially trying to use market timing to generate extra returns.

-- Vik

I'm not going to go and change my asset allocation based on the market's whims. I'm definitely not going to sit a pile of cash waiting for a downturn. But there is absolutely no downside to buckling down and investing more money that would have otherwise been spent during a market downturn. I'm aware of the obvious comeback to this: Why not buckle down and invest more all the time? I'm not willing to live on the bare minimum all the time, but I can dang sure do it for a short while every few years or decades. If it's a market downturn that motivates you to save more for a short time, then better to make use of that motivation.

And to the OP. The advice you've gotten is solid. Invest and don't look back. And remember this nugget from Warren Buffet, "Market forecasters will fill your ear but will never fill your wallet."

[Retire-Canada]

But there is absolutely no downside to buckling down and investing more money that would have otherwise been spent during a market downturn.

I've got no problem with your approach or the Dexterous'. It's one I would follow myself.

What I said above was you can't tell someone to ignore market timing and follow a fixed asset allocation plan.....then in the next sentence tell them to use market timing to increase their return. At least not with any coherent logic.

That's all I was trying to point out.

-- Vik

[Mississippi Mudstache]

But there is absolutely no downside to buckling down and investing more money that would have otherwise been spent during a market downturn.

I've got no problem with your approach or the Dexterous'. It's one I would follow myself.

What I said above was you can't tell someone to ignore market timing and follow a fixed asset allocation plan.....then in the next sentence tell them to use market timing to increase their return. At least not with any coherent logic.

That's all I was trying to point out.

-- Vik

Gotcha, I think we just interpreted the statement a bit differently.

[Wolf359]

You can't time the market.  Okay, I'm reading a lot of classics, so the data here is a little dated.

Source: a Smith-Barney Research Department Report (~1994)
-  From 1980-1993, the S&P 500 returned 15.5% over 3,541 trading days (price appreciation only, not including dividends.)
- If the trader tried to time the market and happened to miss the 10 best trading days, the return for the entire 13-year period dropped to 11.9%.
- If the trader missed the 20 best trading days, the return dropped to 9.5%
- If the trader missed the 30 best trading days, the return dropped to 7.4%
- If the trader missed the 40 best trading days, the return dropped to 5.5%

Over a 13 year period, just a handful of days resulted in a significant market move and was responsible for most of the gains.  If you're sitting on the sidelines on those days, you might as well put your money in CDs.

The conclusion reached -- Don't try to time the market.

Adding funds to try to increase gains is probably not as bad as withdrawing from the market entirely.  It's also probably useful -- it might encourage increased savings boosts from time to time.  If you're wrong, you're still more heavily invested than you would have been before.

[a1smith]

Just out of curiosity - has anyone ever seen published numbers that show what happens if you miss the worst 20, 30, and 40 trading days?

[Retire-Canada]

Just out of curiosity - has anyone ever seen published numbers that show what happens if you miss the worst 20, 30, and 40 trading days?

Many market timers want to miss the worst-performing days, an even bigger issue than the problem of missing the best days. The predicament, however, is that the worst days are equally concentrated and just as difficult to identify in advance as the best days. If someone could have avoided the worst days, they would have obtained true guru status. Figure 4-3 illustrates the value of missing the worst-performing days in the 20-year period from 1994 to 2013. If the 40 worst-performing days of the S&P 500 Index were missed, an investor's increased return would have been 893% more than investors who stayed in the market every day throughout the entire 20 years. The problem, however, is finding the crystal ball that can forecast the 40 worst performing days out of 5,037 days. This shows how market timing can be tempting and alluring.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

[Indexer]

Hello All,

I have allowed my fear of a economy collapse to limit my investing.  I have a 401k in a fixed account earning 3.5%.  This was done after 2008 and since then the market has almost tripled in value.  I have been trying to time when to get back in but have not found the right time.  I do not know what to do?  I see the fed printing money and it scares the hell out of me. Any suggestions?

1.  What you have been doing isn't working so well.
2.  The Fed printing keeping rates super low does create demand which 'can' create inflation.  However during a recession that is creating deflation the super low rates actually just fight the deflation and keep everything normal. 


Suggestion?   Figure out an asset allocation that is appropriate for you.  Invest, and keep investing.  If the market does go down it is a buying oppurtunity.  Not a freak out oppurtunity. 

[Bicycle_B]

Just out of curiosity - has anyone ever seen published numbers that show what happens if you miss the worst 20, 30, and 40 trading days?

Many market timers want to miss the worst-performing days, an even bigger issue than the problem of missing the best days. The predicament, however, is that the worst days are equally concentrated and just as difficult to identify in advance as the best days. If someone could have avoided the worst days, they would have obtained true guru status. Figure 4-3 illustrates the value of missing the worst-performing days in the 20-year period from 1994 to 2013. If the 40 worst-performing days of the S&P 500 Index were missed, an investor's increased return would have been 893% more than investors who stayed in the market every day throughout the entire 20 years. The problem, however, is finding the crystal ball that can forecast the 40 worst performing days out of 5,037 days. This shows how market timing can be tempting and alluring.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

Great link!

[bryan]

Just out of curiosity - has anyone ever seen published numbers that show what happens if you miss the worst 20, 30, and 40 trading days?

Many market timers want to miss the worst-performing days, an even bigger issue than the problem of missing the best days. The predicament, however, is that the worst days are equally concentrated and just as difficult to identify in advance as the best days. If someone could have avoided the worst days, they would have obtained true guru status. Figure 4-3 illustrates the value of missing the worst-performing days in the 20-year period from 1994 to 2013. If the 40 worst-performing days of the S&P 500 Index were missed, an investor's increased return would have been 893% more than investors who stayed in the market every day throughout the entire 20 years. The problem, however, is finding the crystal ball that can forecast the 40 worst performing days out of 5,037 days. This shows how market timing can be tempting and alluring.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

So the simple idea that comes to mind would be to have an algorithm that buys (rebalances) on significant point dips intra-day with any eligible assets. Then slowly add more and more rules to it (trading again if situation worsens). Anyway I guess this para-agrees with the quip to act contrary to the markets.

Anyone have a link to papers or articles on this simple idea? Or is the crux the opportunity cost of the cash/liquid asset sitting on the side earning less return meant for waiting for a buying opportunity?

Sorry, extremely amateur at investing but needing some excuse/analysis to confirm my idea not to finally get a good assets balance away from cash earned in the last couple years into the market now instead of waiting for such dips in the near term.

[skyrefuge]

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

This kind of analysis has always felt a bit silly to me, so I finally did some checking and confirmed my suspicions.

To actually miss the 20 biggest days in the way that results in a 9.22% return shrinking to a 3.02% return requires the following:

1) Selling the day before the big gain
2) Buying back in the very next day, after you just saw a giant gain
3) Being in the market every single other day that's not part of those 20.

Not even the world's dumbest market-timer would behave that way. First he has to have the magical ability to know when the next day is going to be one of the top-20 gaining days. Then, despite the fact that he's a magical genius, he has to be dumb enough to not *buy* on those days, but sell instead. And then this magical man has to be doubly-super-dumb and buy back in the very next day.

As I suspected, if he waits even one more day after that giant gain to buy back in, as even a slightly-less-stupid-than-stupidest-ever magical trader would do ("uh, maybe I'll hold off for a bit?"), his returns will be much better. Most of the top-20 days occur during periods of extreme volatility (a full 10 of the top-20 gaining days in the S&P500 since 1970 occurred in a 6-month period in 2008-2009, in the midst of a giant market crash!!), so in most cases the very next day sees a drop, with nearly all cases seeing a significant drop within a week.

Any actual person who was out of the market for one of those top-gaining days in 2008-2009 was probably out of the market for most of those days, and if so, they probably far outperformed the market because that means they avoided the broader crash.

I guess if it helps convince the naive investor to stay in the market, that's all well and good, but I think more rigorous arguments can be made to support the buy-and-hold strategy.

[humblefi]

You have got some wonderful advice already in this thread. I will add another point of view.

1.
Vanguard classifies investments into 5 risk buckets....1 being the least risky/least to gain and 5 being the most risky/most to gain.
If you want to start diversifying your investments, I would develop an asset allocation model based on the above risk buckets.
I.e. you choose what is your percentage investment in each bucket *BASED* on when you need to start withdrawing the money.

2.
Don't invest all of your money at once. For example, if you have $10000, then spread your investments into 10 installments of $1000 each.
This will help ease your concerns as you slowly get used to investing.

3.
Note that as others have pointed out, keep investing through down and up cycles...dollar cost averaging is a good defense against market ups and downs.
And develop a asset allocation plan that you are comfortable with.

[Kaspian]

I have allowed my fear of a economy collapse to limit my investing.

I see the fed printing money and it scares the hell out of me.

Whoa, dude--you have to completely change your way of thinking!  You're scared of both losing money and losing out on gains?!  In the very same paragraph you describe the problem, the cause of the problem, and then repeat a proposed course of action (market timing) which is what caused the problem to begin with.  My hand hurts because I've been hammering it for so long therefore a good remedy might be to hammer it?  Stop with the crazy.  :)  Stop being scared.  The only things people should be scared of are crocodiles, alligators, and zombies.

[Retire-Canada]

The only things people should be scared of are crocodiles, alligators, and zombies.

And this --->  http://s160.photobucket.com/user/stainless2/media/my%20space%20creations/jihadcat.jpg.html

[a1smith]

The only things people should be scared of are crocodiles, alligators, and zombies.

This guy?  :-D   https://www.youtube.com/watch?v=3fna4KOiH8U

[retireatbirth]

Questionable first post.