Author Topic: Rolling Over Into Vanguard: Timing Current PE Ratios?  (Read 1547 times)

enderb3an

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Rolling Over Into Vanguard: Timing Current PE Ratios?
« on: November 26, 2018, 08:47:32 AM »
Hi folks,

Recently jumped both feet into FIRE-land and have been drinking from the firehose of MMM's website (no pun intended).

Rolling over an old employer 401K (actively managed, too many fees) into a tIRA based on low-cost index funds from Vanguard.

While you can't time the market, MMM clearly suggests using P/E ratios, especially Schiller PE, to get a general sense of when it's a good time to enter the stock market / when it's on sale. See posts:

1- https://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/
2- https://www.mrmoneymustache.com/2011/08/07/summer-clearance-sale-on-us-stocks/
3- https://www.mrmoneymustache.com/2014/08/25/indexview/

The current S&P PE Ratio is 21.77, and Schiller PE is 30. MMM uses 16.4 as the benchmark - above, the market is going to return less than avg returns, below, you'll see greater than average returns over the coming decades.

My rollover just completed and is currently sitting in Vanguard's money-market settlement account. My question is -- does it make sense to wait and keep my money in the money-market account while keeping an eye on the market? Seems like we're about to enter a bear market (taking with a grain of salt, no one can time the market). I would feel foolish dumping in my funds when the PE is so significantly above the historical average.

The other alternative is slowly investing some of it every month.

What am I missing? What would you do?

Many thanks!

Boofinator

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #1 on: November 26, 2018, 09:09:01 AM »
Time in the market, not timing the market, is the key for lay investors like you and me. Pump it into low-cost index funds using your desired asset allocation. Besides, you wouldn't really be timing the market, because presumably that money was already in the market in the 401k?

enderb3an

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #2 on: November 26, 2018, 09:21:57 AM »
Yes, but currently it's in the money market account.

I like that saying, thanks!

Boofinator

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #3 on: November 26, 2018, 09:27:50 AM »
Yes, but currently it's in the money market account.

Was it in the money market account at the 401k? Sounds like it was actively managed, which means probably in the stock market. So you'd be timing the market by not putting it into the market as quickly as possible.

enderb3an

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #4 on: November 26, 2018, 10:14:08 AM »
When you roll money into Vanguard and you don't have allocations set up, they transfer it to the money market account where it sits until you designate funds.

Boofinator

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #5 on: November 26, 2018, 11:32:48 AM »
When you roll money into Vanguard and you don't have allocations set up, they transfer it to the money market account where it sits until you designate funds.

I understand. But you just rolled it over, from an account where the money was (presumably) in the stock market. So you're essentially market timing if you don't reinvest as soon as possible. Anyway, I'm beating the horse to death here....

As far as PE ratios: Yes, they are high, though there is some debate as to whether their current heights can be compared to past heights due to changes in accounting practices. That being said, you should consider a few things.

Do you have an investment policy statement (IPS)? https://www.bogleheads.org/wiki/Investment_policy_statement This will help you develop a strategic investment strategy. An IPS allows for market timing, if that is your desired approach. However, the question for market timing is always, What do you know that the vast majority of buyers and sellers in the market (who are paid full time to perform this job) do not? Market timing is a very difficult game to win, since the market goes up on average, people can have irrational exuberance for long periods of time, and you have to accurately time the market on the way out and the way back in. Good luck.

The second thing to consider if you want to time the market by getting out of stocks are the investment alternatives. Are you going to let your money sit in Vanguard's money market earning chump change? Are you going to invest in bonds, which have lower expected returns than stocks, but can also lose money? What is your planned alternative to stocks if you are going to time the PE ratio?

enderb3an

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #6 on: November 26, 2018, 01:01:38 PM »
Thanks for that. I don't have an IPS (never heard of one), but I see I would benefit from creating one. Thank you.

I don't pretend to know anything more/better than the market's buyers and sellers. I'm merely observing some basic truths: we are in the longest bull-market in history. Markets inevitably cycle, and we're due for a major correction / recession any day. The recent pull-back on interest rates, mixed with popular sentiment seems to clearly signal this recent correction has a significant probability of being the beginning of a recession. I write this post with the assumption that I am wrong...and I'm asking for help to identify the gaps in my thinking. Surely I can't time "top" or "bottom" and I'm not interested in that...rather, if my above observations hold, wouldn't it be wise to wait until the market declines (surely, more likely sooner rather than later)?

If that is not unwise, then I suppose I have three options (unless anyone can see more):
1 -- Hold my money in the money market account (I don't even know if this is possible since there's a window for rolling over a 401k into an IRA without a withdrawal penalty)
2 -- Slowly enter the market with smaller portions of investments over coming weeks/months (same concern as 1.)
3 -- Buy a significantly larger allocation of bonds, then sell and purchase stock when the market has significantly dipped. This brings into play trading fees and taxes, I imagine.

Thoughts?

Thanks again

walkwalkwalk

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #7 on: November 26, 2018, 01:12:48 PM »
Where's the dead horse so I can beat it?

DS

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #8 on: November 26, 2018, 01:22:19 PM »
I don't pretend to know anything more/better than the market's buyers and sellers.

Surely I can't time "top" or "bottom" and I'm not interested in that

While you can't time the market,

Seems like we're about to enter a bear market

(taking with a grain of salt, no one can time the market)

Do you think you can time the market?

Boofinator

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #9 on: November 26, 2018, 01:46:12 PM »
First, no need to worry about taxes (IRA) or trading fees (Vanguard index funds).

Second, I see the same basic truths and don't disagree. In fact, I do a little gut-level market timing myself (I've recently started putting excess funds toward the mortgage (4.25%) rather than a taxable account). So I certainly see your position.

However, I have not sold any stocks. In fact, I am continuing to contribute to my tax-favored accounts. Here's why:

1) I do not know enough about the underlying economic principles to really say that the market is overvalued. I do know CAPE has some serious flaws.

2) Even if I did know everything there is to know, I face the prospect of irrational exuberance. Let's use the defining example. In December of 1996, Fed Chairman Greenspan coined the phrase "irrational exuberance" in reference to the stock market. The last few years had seen a doubling of the market with CAGR of about 20% (with dividends reinvested). People were investing in all sorts of ill-advised internet startup companies. Frankly, that a bubble was forming was not a secret. Yet, what would have happened if you had taken the Fed Chairman's words to heart and pulled out of the stock market? Over the next few years, as your money sat on the sidelines, you would have missed a doubling again of the market. And if you held all the way through the nadir in October 2002, your investment would have still returned approximately 4% per year. The lesson here is even though you know it is going to happen, you don't know when it is going to happen.

So, that's my philosophy. If you don't want to invest in stocks with your IRA, I would suggest as an alternative total bond over the money market, as you have a much better chance of getting a somewhat decent return. This would correspond with your #3.

enderb3an

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #10 on: November 26, 2018, 02:14:39 PM »
Boofinator - thanks for that thoughtful and kind response. You're right. I appreciate it - thanks for enlightening me, and the useful guidance.

harvestbook

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #11 on: November 26, 2018, 07:12:26 PM »
It's not the longest bull market unless you're pedantic about a 20 percent closing loss as a firm definition, which seems kind of silly.

https://thereformedbroker.com/2018/08/09/today-we-put-all-bull-market-arguments-to-bed/

Schiller PEs have been high ever since the guy won a Nobel Prize. Hmm.

Are we really "due" for anything? Based on what? A feeling? Everyone expects another 2000- and 2008-style crash because those are the two within memory, yet they are rarities in history.

I believe recessions start long before anyone notices, usually when everybody thinks things are "good." Which would kind of be now, because "everybody knows" the economy is good yet the stock market has dropped, housing has dropped, oil tanked, corporate layoffs are coming, etc. There seems to be a shift in the Common Knowledge, as everyone is now starting to blame the Fed and rate hikes for everything. So it's possible the recession has already started. We'll only know much later.

Things always feels unsettled and like the other shoe is about to drop. Warren Buffet bought his first stocks when the US was losing the war with Japan. That turned out okay.

Psychology is important, but every day you wait, you are missing out on dividends that are still higher than money markets at a cheaper expense ratio. I'd lump half and dollar-cost average the other half on a set schedule that you can stick with. Good luck.

Boofinator

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #12 on: November 26, 2018, 08:45:48 PM »
If you haven't heard of Bob, his story is instructive.

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Radagast

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #13 on: November 26, 2018, 08:57:22 PM »
PE ratios are long term indicators that have no predictive value in the short term. They are literally worthless for your purpose. The PE10 ratio is best predictive of real stock returns 20 years in the future as I recall, with one source saying it had the greatest correlation at 17 years and another at 22 years (I don't keep track of what I read) both with fairly broad plateaus and either way showing to be just OK as a predictor. It is most predictive of nominal returns 7 years in the future. The PE1 is not especially useful, period.

Second 6th Duck Duck Go result:
http://www.investaura.co/2012/07/why-pe-ratios-are-useless/
-> 68% of the ‘monster’ drops in the stock market (more than 10% down in one year) happened when the P/E was lower than 16
-> When the P/Es were higher than 20, the market ended the year down in 30% of the years; but when the P/Es were lower than 20, the market also ended the year down in 30% of the case! So high P/Es are not more risky then low P/Es.

Vanguard:
https://personal.vanguard.com/pdf/s338.pdf

etc.

For periods of about year or less, the best predictor of what the market will do in the next X is a combination of "similar as it did last X" and "it will go up."

The appropriate advice is to choose an asset allocation that is appropriate and then put all your money in yesterday. Or tomorrow, I hear the market will tank 2+% tomorrow.
« Last Edit: November 26, 2018, 09:04:06 PM by Radagast »

Scandium

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #14 on: November 28, 2018, 12:56:07 PM »
Regarding the Schiller (i.e. 10-year) PE, aren't we now about to roll the great recession earnings numbers of 08-09 out of it? I would think that will change change things a bit?

Car Jack

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #15 on: November 28, 2018, 01:04:27 PM »
Find the JL Collins youtube from earlier this year when he spent an hour at Google.  He tells it like it is.  Do you know what PE ratios told us just before the bottom fell out in 2008?  Nothing.  Do you know what they told us when the market was about to skyrocket in the spring of 09?  Nothing.  DO NO TIMING!  Time in the market, not timing the market.  When you have money to invest, do not delay.  Do not think.  Just invest. 

I've actually never followed JL Collins before but hear about him from time to time over on Bogleheads.  One thing that made me smile at the 31 minute mark.  He quotes the same Fidelity study of their 401k owners as I tell people about all the time.  The type of people whose 401k consistently outperformed all others were......wait for it......dead.  The second best performers had forgotten that they had an account.  Just invest and then leave it the hell alone.

enderb3an

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Re: Rolling Over Into Vanguard: Timing Current PE Ratios?
« Reply #16 on: November 30, 2018, 05:07:41 PM »
Hi folks - Just wanted to thank you all for taking the time to provide advice. I ended up making one lump sum investment into a 90/10 three-fund index fund portfolio at Vanguard, as soon as I could...and learned a good amount from the experience <3.