Roth IRA contribution planning - Sequester

[cbr shadow]

I know you can't "time the market" very consistantly, but let me know what you think about the following..

Before every big political decision that effects our economy there seems to be  sharp decline in the stock market, followed by a big rise after it gets sorted out.  This happened with the debt ceiling recently.  Is it reasonable to think it will happen with the sequester too?  There's uncertainty in the economy up until a decision is made in congress (likely not until the deadline, 3/1/13).  So should I plan my Roth IRA contribution (and my wife's contribution) around the sequester market dip?  We're ready to fully fund both accounts ($5500 each).  Would it be more prudent to do a dollar-cost-averaging approach?

Thanks,
Ryan

[madage]

Sounds very similar to The Finance Buff's Buying on a dip experiment: http://thefinancebuff.com/experiment-buying-on-a-dip.html

Here's the update for 2013: http://thefinancebuff.com/buying-on-dip-with-2013-ira-contribution.html

It worked out pretty well for him. You need to decide if you're comfortable with the opposite scenario. What if you're wrong, Congress figures things out and the market rejoices instead? If you're comfortable missing out on some possible gains, go for it and let us know how it went!

If you're not reading TFB, I highly recommend him.

[KingCoin]

Beating the market isn't that obvious. You don't know anything that everyone else doesn't. I'd just pull the trigger or dollar cost average.

"The Finance Buff" may be a good writer in general, but his "buy the dip" analysis is incredibly facile. He's gambling that he can save 2% on his purchase at the risk of missing a massive run. I haven't done the analysis myself (nor has The Finance Buff), but I'd wager that this is a losing strategy over the long run due to the positive expected returns of stocks.

His summary isn't exactly born out rigorous analysis and clear thinking, "Is it all luck? Maybe. I’m sure there will be a year I will be waiting all year only to see the price going up higher and higher. I don’t know if I want to chase that kind of market. Maybe the $100 in other years along the way will make up for it. Maybe not."

Ok. I'm done trashing your guy.

[madage]

Ok. I'm done trashing your guy.

No big deal. I wasn't advocating it, just as he isn't. Merely comparing strategies.

I'm pretty sure TFB has a very large portfolio, so missing out on gains for one year isn't a big deal to him, but it would be for me.

[Tyler]

Generally speaking, your investment time frame is so long with a retirement account that an extra percent or two on day one will be nothing but market noise by the time you retire.  It's fun to luck into just from an emotional perspective, but I personally wouldn't stress about it.

[cbr shadow]

All good points, just as I would expect from this group.  Thanks

[chucklesmcgee]

The market's going to go up or down based on whether people sell or not. Basically every investor is aware of the looming sequester and has their own predictions as to how long such an event will play out and has their own predictions as to the market.

Unless you have more information about the sequester, say you know a page in Congress who can text you critical details about issues or the mood on capital hill before the press reports it, how do you expect to be able to do better than most investors, many of whom have spent dozens if not hundreds of hours researching potential scenarios and their likelihood?

[AccidentalMiser]

I'm going to add my opinion here.  I usually stay fairly well invested in the market with high dividend stocks making up the lion's share of my portfolio.  I am normally a good dollar-cost-averager which has worked out fairly well over the years.  Right now, however, I have about 50-60% in cash as I am very concerned about the valuation of the market right now.

I have a variety of stocks that I would love to own for the right prices.  I set up limit orders at prices I would be happy with and wait...and wait...and wait.  This is sort of like buying the dips, only on steroids.  I'm waiting on the DIP (think 2009 or 2002.)

Will it happen?  Maybe not.  But I won't be crying along with the complainypants crowd if it does!  If the economy stabilizes and perks up, then I will leg back in to 80-90% invested.

[BYUvol]

If the economy stabilizes and perks up, then I will leg back in to 80-90% invested.

Buy high, sell low... I like it.

In all seriousness, everyone has to stick with whatever investing strategy lets them sleep at night. In my opinion, every strategy that involves regularly investing a large percentage of your income into dollar producing assets will get you where you want to go, at a rate faster than the average Joe.

If you enjoy the intellectual activity of trying to value companies, then great, but I wouldn't expend too much energy trying to understand the market's movement at any given time, because in investing "... the rearview mirror is always clearer than the windshield." - Warren Buffet

[the fixer]

The only timing I'll participate in anymore is with P/E ratios, and things seem a bit high.  So I started holding off on new buys to accumulate cash for a few months, which I needed to do this year anyway at some point.

But as for trying to time the Sequester, I can see how someone inside the beltway could make a profit. Wall Street has a bad record of understanding what goes on in DC. I think it's feasible for a citizen who lives and grew up here to understand the workings of Congress and the federal government in general better than the average analyst. That doesn't mean I think it would be easy to do so.

[AccidentalMiser]

If the economy stabilizes and perks up, then I will leg back in to 80-90% invested.

Buy high, sell low... I like it.

I have no intention of selling.  I'm in for the dividends.