Is investing aggressively over a short time period risky?

[webguy]

This question has been playing on my mind for a while and so I thought I'd put it to you fine mustachians and ask your opinions.

Is investing a large amount over a short number of years risky in the sense that you aren't very well diversified over a significant time period? To be more specific, I'm hoping to invest about $150k per year for the next 4-5 years. I would then theoretically FIRE and drop this down to around $10k per year indefinitely. There's no way of knowing whether this bull market will continue for the next few years, but if it does then does this put me at some risk of having dumped a lot of money into the market during that limited amount of time?

Traditional retirement investing strategy essentially has you dollar cost averaging into a retirement account over 30-40 years, where the market goes through several cycles and there are many buying opportunites and the chance to take advantage of those by buying low. But for people investing in order to retire within 4, 5 or 6 years are putting all of their money into the market during the same market cycle. I know that at some point the market will crash, it could be tomorrow or it could be 10-20 years from now, but I'm slightly worried that as I'm investing all of my income within the next few years then I could potentially never be able to take advantage of any buying opportunities as the market could stay high for that entire 4-5 year period.

Hopefully my question makes sense. Does anyone have any thoughts on this?

[Frankies Girl]

My personal opinion is that investing for short term should be safer in general. If you're counting on a raging bull market (high returns) to make up for what you lack in time horizon, you're basically gambling. But hey, people can get lucky at gambling.

I've thought about this some myself since I'll be RE within the next year and the husband in the next two, so we're basically in the final run up (less than 3 years). I do have my investments pretty aggressive, but we have a few back ups; we are shooting high on our final number before we pull the trigger, if it's way down when it's my time, I keep working, same thing for husband - works a few years longer, I go back to work... we're not ruling out part time work for either of us at any time.

So I guess it really depends on whether you'll be counting heavily on that money within 5 or so years.

[Shor]

Better now than later, and better late than never.
I would say, if you are concerned about hitting the market on a high note, diversify a portion in to Bonds, or something that might stay afloat if a crash comes along. On that note, even if a crash does come, if it hits in the early years, you will be happy to be buying up at firesale prices. If it hits 5 years down the road, your investments will already have appreciated 40% and the "crash" will be a blip on the radar for you to weather through.

In all cases, the more you put in now, the better your chances of having more in the future, just don't get scared and pull out early, and you will be just fine. Also, that's enough money to do a lot of things that might save you more money. So consider if there are any other things you can use that money toward besides market investing, such as debts, loans, family security, house by work, a bicycle, a home garden, otherwise best of luck.

[arebelspy]

Better now than later, and better late than never.

This.

You are worried about things outside your control.  You control your savings rate.

So save as much as possible, as soon as possible.  Invest it according to your IPS/AA.

If the market crashes, maybe you work a bit longer.  If it's high and crashes after you ER, maybe you adjust spending.

But don't worry about things you don't control.

[MDM]

If you think the market will drop, short it.  If you think it will rise, invest in it.  If you think it will stay flat, invest for the highest interest and dividends.  Part of this is psychological: would you be more upset if the market drops and you lose a little, or if you only make a little while the market goes up a lot?

Previous posts all raise good points and things to consider.

If you don't "invest about $150k per year for the next 4-5 years", what will you do with that $600k-$750k instead? 

[webguy]

Thanks for the replies guys, I appreciate all of your thoughts and advice.

I'm hoping not to rely on this money once I'm FI and definitely have some flexibility of being able to work longer if need be so I guess that takes away some of the (perceived) risk. I started an online business last year and so far it's being doing well, I enjoy it a lot but it's quite time demanding at the moment (customer support emails every day, etc). My plan is to continue to grow the business over the next few years, sock away as much money as possible and then cut back and have the business support me and my family during "retirement" where I'll hopefully only be working a couple of hours a week to maintain things. As with all small businesses there's always a chance that things could go tits up, and so my wife and I are trying to take advantage of saving as much as possible now to give ourselves some security. I'm pretty new to investing (started in 2012) and although I've learned a lot from these forums and have a strategy in place, putting all of our money into the market in a relatively short amount seemed a little risky. Your thoughts on the matter have helped me to see that it isn't as risky as I first thought.

Having a high income is all new to me. I've never earned more than $68,500/year and then suddenly my business took off and I could potentially earn $250-300k this year. I just wanted to make sure I wasn't overlooking something when dumping it all into the market. Investing $2-4k a month feels a lot less risky then investing $10-15k a month.

If you don't "invest about $150k per year for the next 4-5 years", what will you do with that $600k-$750k instead?

That's a good question. To be honest, my wife and I have everything we need. The only thing I really desire is the freedom to be able to raise my future children, travel and live life on our own terms. I'd probably pay off the mortgage (although it's only 2.625% interest) and travel, but I'd rather focus on growing my business over the next few years and then travel later. Our investments are currently only ~$160k and so I'd like to get that number up as high as possible before we start having kids in a year or two. I've learned that it's important to diversify income streams and so don't want to rely on my business income to support us. I'd like to have a hefty stache so that we can fall back onto investment income if need be.

[Cyrano]

Once you've invested the money, it doesn't matter whether you invested it over 5 years or 30 years. Money has no memory.

The tax authorities do have a memory, but that's a secondary consideration. In general the right time to invest money is when you have it.

[innerscorecard]

You should invest as aggressively as your situation stomach can handle. Which may not be that aggressively at all.

How did you behave in 2008?

[Cottonswab]

If it was my money, I would not dump all of your income directly into the stock market at current valuations. 

In my opinion, you should start by setting target stock allocations, based on relative valuation of the market.   I use the Morningstar "fair value" assessement (http://www.morningstar.com/market-valuation/market-fair-value-graph.aspx) as a proxy.  My allocation to stocks is inversely proportional to the "fair velue". 

[soccerluvof4]

This is a common question that seems to come up a lot perhaps just asked in various ways. On a personal note whether it cost me or not i felt as far as my index funds (since i trade daily) I would invest my Lump sum over the course of a year on dips. But my weekly allocation on additional earnings went in weekly on automatic distribution. I found this to be away I could sleep at night. If the market climbed and I missed some upside then I would just use my trading more and short the market. Trying to time the market...so be it. But at some point as long as your investing do what also makes you comfortable. Because at the end of the day thats what others are doing

[kyleaaa]

Yeah, of course it's riskier. Shorter time horizon = fewer equities. Unless you can afford to miss your goal by A LOT.

[hodedofome]

The 'safest' time to get into a strategy is during a dip/drawdown/bear market, whatever you want to call it. The market could continue to grind higher without ever dipping more than 5% for years, or it could crash and provide a good buying opportunity, or it could be flat for years. Anything is possible and the future is unknowable.

You would do best to read all the books you can and learn a way of investing that fits YOU. Going off of someone else's strategy is not wise because if it doesn't fit your personality, you probably won't stick with it. Although, you may not have the time to learn if your business is taking up so much of your time. Is there any reason why you can't reinvest some money back into your business and just live off of that? IMO investing in what you know (your business), rather than stocks (which you don't know) isn't a bad idea at all.

[foobar]

Sounds like you need less in stocks and more in bonds.  When you feel like playing the market timing game, you can change your allocation to be more or less aggressive.

This question has been playing on my mind for a while and so I thought I'd put it to you fine mustachians and ask your opinions.

Is investing a large amount over a short number of years risky in the sense that you aren't very well diversified over a significant time period? To be more specific, I'm hoping to invest about $150k per year for the next 4-5 years. I would then theoretically FIRE and drop this down to around $10k per year indefinitely. There's no way of knowing whether this bull market will continue for the next few years, but if it does then does this put me at some risk of having dumped a lot of money into the market during that limited amount of time?

Traditional retirement investing strategy essentially has you dollar cost averaging into a retirement account over 30-40 years, where the market goes through several cycles and there are many buying opportunites and the chance to take advantage of those by buying low. But for people investing in order to retire within 4, 5 or 6 years are putting all of their money into the market during the same market cycle. I know that at some point the market will crash, it could be tomorrow or it could be 10-20 years from now, but I'm slightly worried that as I'm investing all of my income within the next few years then I could potentially never be able to take advantage of any buying opportunities as the market could stay high for that entire 4-5 year period.

Hopefully my question makes sense. Does anyone have any thoughts on this?

[KBecks]

Are you saying that you don't need that money for more than 5 years?   The "general" advice is that any money you need sooner than 3-5 years should not be in the stock market, it should be kept in cash.   It sounds like you are on the borderline of that time frame.  Take some time to work up an investment philosophy that you feel really good about.  Best wishes! 

[webguy]

Thanks for all of the replies!

You should invest as aggressively as your situation stomach can handle. Which may not be that aggressively at all.

How did you behave in 2008?

I wasn't investing in 2008 as I was still at university. I'm 28 and have been investing since late 2012. I'm comfortable with my AA and the level of risk I'm currently exposed to and plan to buy and hold for 30+ years. Although I used my situation as a specific example it seems like most people striving for early retirement would be investing within a tighter timeframe than most, and so was curious to know people's thoughts on whether that exposes us to greater risk.

If it was my money, I would not dump all of your income directly into the stock market at current valuations. 

In my opinion, you should start by setting target stock allocations, based on relative valuation of the market.   I use the Morningstar "fair value" assessement (http://www.morningstar.com/market-valuation/market-fair-value-graph.aspx) as a proxy.  My allocation to stocks is inversely proportional to the "fair velue".

Thanks for that link, I hadn't seen it before and it looks very useful!

This is a common question that seems to come up a lot perhaps just asked in various ways. On a personal note whether it cost me or not i felt as far as my index funds (since i trade daily) I would invest my Lump sum over the course of a year on dips. But my weekly allocation on additional earnings went in weekly on automatic distribution. I found this to be away I could sleep at night. If the market climbed and I missed some upside then I would just use my trading more and short the market. Trying to time the market...so be it. But at some point as long as your investing do what also makes you comfortable. Because at the end of the day thats what others are doing

I like this approach. I don't have any automatic contributions set up as up until recently my monthly income wasn't very consistent but I think I'm going to start making more regular contributions rather than large sporadic lump sums, and then make some smaller contributions based on market fluctuations.

Is there any reason why you can't reinvest some money back into your business and just live off of that? IMO investing in what you know (your business), rather than stocks (which you don't know) isn't a bad idea at all.

I've thought about this in the past. I'm currently a one man show and have thought about hiring help in certain areas, particularly with customer support as that's the main time-suck. I'm the developer of the product which I sell and so am able to provide very effective support to customers because of that. I suppose I have reservations regarding hiring a bad customer support rep which may damage the product/company's reputation. I am indirectly investing in my business this year though by allowing my wife to quit her job (which she doesn't enjoy) to help with some business admin things. I am going to think harder though about how I can invest in my own business, as you're right that it makes far more sense to do that.

Are you saying that you don't need that money for more than 5 years?   The "general" advice is that any money you need sooner than 3-5 years should not be in the stock market, it should be kept in cash.   It sounds like you are on the borderline of that time frame.  Take some time to work up an investment philosophy that you feel really good about.  Best wishes!

If all goes to plan I won't need the money for 20-30 years. About 50% of it will be "old man money" which will (hopefully) grow untouched in our retirement accounts. I plan to have my business support us during the next 10-20 years or so if possible with the other 50% of the savings acting as a buffer. I'm a developer and so enjoy creating products (which will hopefully produce income) and don't envision that changing during retirement. It's just the other parts of my business that I want to "retire" from.