Author Topic: I don't get it  (Read 2700 times)

trailrated

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I don't get it
« on: July 08, 2014, 03:03:54 PM »
Quick background, I invest in low cost etf's because it is simple and effective. Trying to take it a step further, can someone please point me in the direction to get more information on the following:

It is my 5th grade level understanding that when the market goes flying through the roof, people have more $ and housing prices, etc. go up as well. When the market tanks, people have less $ and housing prices, etc. go down.

That being said, I see people talking about buying in down markets.... not dollar cost averaging or reoccurring set payments but "hey the market is so low right now I am going to throw 100k or more in because it is a bargain" (generic example). Where does that money come from? Do these people sell other assets at a loss to put into these funds, houses etc. Do these people keep huge cash reserves on hand? If that is the case is it "worth" it because they could miss out on the gains while this money is on the sidelines?

Like I said, if anyone can point me in the right direction of a book or give me a basic understanding it would be appreciated.

gimp

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Re: I don't get it
« Reply #1 on: July 08, 2014, 03:37:44 PM »
- Some people keep large cash reserves on hand.
- Some people have cash flow. For example, maybe I usually invest $x/year that I get from some source, so this year I'll put it all into stocks instead of real estate, or whatever.
- Some people rebalance. Say you had $75k in stocks and $25k in bonds, your stock prices dropped to $60k, so now you sell some bonds and buy some stock until you're back at 75/25.

Keeping cash reserves on hand is great for low risk, bad for returns. Generally keeping cash to time the market is a loser's proposition.

Cash flow makes a lot of sense. That one is pretty obvious: buy undervalued instead of overvalued for any given year. (How to tell what's overvalued and undervalued is a different question, but in a recession generally you know that stocks will jump later.)

Rebalancing isn't really market timing; people usually do it every year, or twice a year, or every quarter; many people have it done automatically.

trailrated

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Re: I don't get it
« Reply #2 on: July 08, 2014, 04:21:23 PM »
Much appreciated

aclarridge

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Re: I don't get it
« Reply #3 on: July 08, 2014, 05:41:56 PM »
I see people talking about buying in down markets.... not dollar cost averaging or reoccurring set payments but "hey the market is so low right now I am going to throw 100k or more in because it is a bargain" (generic example).

Yeah that's market timing and I know MMM alluded to it as well in some of his posts. My understanding is that if you really believe you can't time the market, your reinvestments would happen at regular time intervals (the length of which coincides with the amount of time it takes you to save enough to make the transaction fees negligible, for me this is quarterly but for many who have 0 transaction fees for buying, it's on every paycheck).

arebelspy

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Re: I don't get it
« Reply #4 on: July 08, 2014, 06:05:44 PM »
Yeah, don't do it.  Invest when you have the money.  Invest over time.  You will grow wealthy.  Trying to time the market is a fool's game.

If the market tanks, cut back on your spending if you want to buy a bunch more.  Don't have idle cash sitting, waiting, hoping for a drop.  :)
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clifp

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Re: I don't get it
« Reply #5 on: July 08, 2014, 08:51:56 PM »
During the 2008/9 crash, my government bonds increased in value as everyone rushed to safety.  I sold most of them and used the proceeds to buy stocks. I generally have a modest 3-5% amount of cash (not including long term CDs) floating around from dividends, and interest and/or sales of securities that haven't re-invested.   I took that down to the bare minimum.  Finally I apply a form of margin (i.e.) through the use of options. (definitely not recommended for beginners)  Anyway those are all the ways I raised cash to buy stocks.