Is now a bad time to invest in stock index funds?

[Goatee Joe]

I have a dilemma.  I want to take a chunk of cash from savings (maybe about $10K) and invest it in a Vanguard stock index fund (VTSMX or VTSAX), but have been hesitant to pull the trigger on it since the stock market has been blowing up over the past couple months.  Should I wait, or perhaps consider some alternate funds (bonds, REIT, etc)?  I'd planned to move cash into an investment account in the new year, but am concerned that this is starting to look like a classic case of buying when the market's high.  Am I wrong or a just a wuss?  Feel free to bitch-slap me with your superior investing knowledge/experience.  Thanks.

[sulaco]

It's hard to diversify 10K too much, but you might want to look at choosing funds over several asset classes to avoid the affects of a pull back in the US stock market. Many funds have minimum investments (for examples, VTSMX is $3K), but others don't.

I think you should put your money into something, (including a market index fund like VTSMX), but also look at an international index fund (which have been recovering nicely over the past year), REITs and maybe even a bond fund if you can find one with a small or no-minimum investment.

Bogleheads has great advice for choosing your asset allocation, and a book like the Intelligent Asset Allocator can help you confirm your choice of allocation.

[Kriegsspiel]

Will this be your first investment buy?

[Goatee Joe]

Will this be your first investment buy?

Not technically... I've been investing via my work's 401K plan for the past few years, the majority of which is in stocks.  First time buying anything from Vanguard though.

[chucklesmcgee]

No, it's not a bad time. You can't time the market sitting at home. Period. You can't know if the market's high or low.

[Mike]

I need more information.  Is the account tax advantaged (IRA/Roth IRA) or taxable?  What is your tolerance for risk?  What is your expected length of time of holding the investment?

For taxable accounts, you're better off with stock index funds.  Bond funds have interest yield which is taxed at your marginal rate (bad), so they should be held in your tax advantaged accounts such as your 401k or IRA/Roth (unless of course you go with tax exempt bonds such as municipals, but I feel like that is needlessly complicated).

I'd also mention that ETFs are a great option given the lack of minimum investment required (just buy the shares at whatever price they are at).  Plus Vanguard has equivalent ETFs for most of its funds that you'd need, and their expense ratios are the same or lower than the mutual funds (win-win).

As far as all-at-once or incremental investment is concerned, I prefer incremental.  If you buy $1000 worth of something each week for 2 1/2 months, you're bound to catch some price volatility in that span as opposed to just randomly dumping $10k into the market.

[JamesAt15]

If no one else is going to mention it, I will - MMM wrote an article How To Tell When The Stock Market Is On Sale which you may find interesting.

That said, I agree with the advice posted above.

[smedleyb]

If no one else is going to mention it, I will - MMM wrote an article How To Tell When The Stock Market Is On Sale which you may find interesting.

That said, I agree with the advice posted above.

Interesting that the Boss uses a historic P/E valuation model to help determine when stock seem over or under valued. 

Along those lines here's recent breakdown of the Shiller P/E ratio which suggests that stocks are 37% a above the historical mean P/E of 16.5:

http://www.gurufocus.com/shiller-PE.php

[sheepstache]

What is your timeframe?  That is, how long do you intend to leave the money in the market?

[lauren_knows]

If no one else is going to mention it, I will - MMM wrote an article How To Tell When The Stock Market Is On Sale which you may find interesting.

That said, I agree with the advice posted above.

If you're dollar-cost-averaging, what exactly do you do with this information? Pick an arbitrary PE ratio, and only buy when it's below that number (and stock up your cash reserve otherwise)?

FWIW, I just bought my monthly chunk of VTSMX.

[Jamesqf]

First question: how long is your investment timeframe?  If it's a decade or more, that's different than if you expect you might need to pull out the money within months to years.

Second point: don't know about Vanguard specifically, but many/most mutual funds have an annual fee for accounts less than some minimum, often around $10K.

[turtlefield76]

With $10k you can buy into 3 Vanguard funds.  Most have a $3k minimum buy the target funds have a $1k minimum buy.

Yes domestic stocks are high right now.  But it better to just start investing IMO.  If you are worried about putting it all in the domestic stocks you could consider the following:

$4k in VTSMX - total US stock market
$3k in VGTSX - total international stock market
$3k in VBMFX - total bond market

This would give you pretty broad exposure to the entire economy of the world and the US bond market.  A lot of people will use these three plus maybe an REIT index for a good well diversified 3/4 fund portfolio. 

[Kriegsspiel]

Yea, I was asking to see if you were starting from scratch.  I'd personally recommend figuring out your asset allocation, and just dividing the 10k up between it at the beginning like turtle said.  That way, you can start rebalancing (buying low, selling high) immediately.  I believe this is a pretty vanilla application of modern portfolio theory. 

I would also say whatever % allocation you come up with, have some % in cash.  It's a good buffer to jump on opportunities, instead of being "all in" already. 

[JamesAt15]

If no one else is going to mention it, I will - MMM wrote an article How To Tell When The Stock Market Is On Sale which you may find interesting.

That said, I agree with the advice posted above.

If you're dollar-cost-averaging, what exactly do you do with this information? Pick an arbitrary PE ratio, and only buy when it's below that number (and stock up your cash reserve otherwise)?

FWIW, I just bought my monthly chunk of VTSMX.

Well, I threw it out for discussion but I don't have a strong plan based on it.

One of the links in the MMM article to Investors Friend says "The author believes that a fair value for the S&P 500 Index is within the range of 1271 (for required expected return of 8%) to 1504 (for required expected return of 6%), with a mid-point estimate of 1387 (for required expected return of 7%)."

The S&P 500 is currently at right about 1500, so if we believe this valuation model, we would expect that buying an S&P500 index fund now will give us about a 6% return on average. This is a little lower than the 7% return we would like if we bought it right when it is "fairly priced", but unless we have some alternative investment we are considering making that we think will give us a return more than 6%, I still don't think it's a bad idea to buy into the S&P500 now, particularly compared to keeping the money in a savings account.

[Mike]

Yes domestic stocks are high right now.  But it better to just start investing IMO.  If you are worried about putting it all in the domestic stocks you could consider the following:

$4k in VTSMX - total US stock market
$3k in VGTSX - total international stock market
$3k in VBMFX - total bond market

This would give you pretty broad exposure to the entire economy of the world and the US bond market.  A lot of people will use these three plus maybe an REIT index for a good well diversified 3/4 fund portfolio.

ETF equivalents are VTI, VXUS, and BND.  Vanguard's REIT ETF is VNQ. 

[Goatee Joe]

Hi all -- Thanks for the advice above.  To answer the question about timeframe, definitely at least a few years.  I have no reason to need the money in cash within three years, and realistically probably not within the next five years.  Not sure where that places me on the risk-aversion scale, but I guess it means I can tolerate some ups and downs.

On the question of taxable vs. tax-deferred accounts, I guess I'm talking only taxable investments here.  I'm maxing out my 401K (actually it's the Thrift Savings Plan since I work for Uncle Sam), so I'm getting the maximum tax deferral there.  A follow-on question to that:  in 2013, the maximum contribution to a tax-deferred 401K (or TSP) is $17,500.  Does that mean I'm not eligible to buy any other such funds like a Roth IRA or Traditional IRA?  Sorry for the dumb question, but I'm not up on the rules for this stuff.

Bottom line is, I really feel like that money's just wasting away in my ING Savings account, earning only 0.80% right now, and I can risk it in order to grow it.  And thanks for the link to the MMM article.  Been reading this blog voraciously since I discovered it a couple months ago, but somehow missed that particular piece.

[Colterha]

Hey Goatee Joe,

I'm new to the MMM forums and investing to some extent- but I CAN tell you that you can still contribute to an IRA after maxing out your employer sponsored 401k. (This is in fact recommended if there's a match up to a certain percentage.)

The annual contribution limits for both traditional and Roth are 5,000 for 2012 and 5,500 for 2013. You have until tax day in April to contribute for last year, so definitely take advantage of that! Your entire $10k could be in tax-sheltered accounts. (Roth for me, personally)

Like you, I also worried that it was a bad time to invest in index funds and ETFs, but have since read several articles which suggest that there's no time like the present, especially considering the power of compounding returns. (Dividend Reinvestment in a Roth IRA is a snap!)

I'll look for these and try to remember to post them.

Best of luck! Have you chosen a brokerage/fund family?

[the fixer]

Typical risk tolerance for stocks is 10 years; if you NEED the money before then, it shouldn't be in the stock market unless it's a very small percentage. But the important thing is how you define "need."

Is it for a downpayment on a house? If, five years from now, your investments lost money, would you just put off your home purchase and wait a few years for the market to recover? Flexibility in your plans greatly increases your ability to take risk.

As for when to buy, I think the answer is always "right now." You can try to play games and guess when the market is going to go down, and many times you'll be right and gain an extra 0.5-1% return (that's a one time return, not per year BTW), but sometimes you'll delay your purchase and miss out on a big bull move. The best article I've read on this is here: http://www.obliviousinvestor.com/finding-the-best-time-to-invest/

Find out if you're eligible for a Roth IRA before you buy, though. You might be, it depends on your income. And if you're not but you're willing to do some extra work, you can do backdoor Roth contributions (but the rules on distributions are a little different). http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html