Wait for correction?

[stupendous_stash]

Dear 'stash people
I have been following the blog for a few months now and still have my investments in terrible shape, so this cry for help. We are a couple with a two year old, living in high cost area (NY/NJ). We have been saving up decently but been very bad with investments. We have some real estate (a home in USA and investment property in India), some in stocks and bonds between 401k and taxable account (60% stocks, 40% bonds) and almost 150K in bank account. Basically waiting for 'the next correction' that never comes. What is a new mustachian to do - Go all in with market at this level? Go 50/50 stocks and bonds with a set schedule to convert it all to stocks?

Part two of this is more specific : Our income is above the deduction limit for Roth IRA (and I belive we can't do traditional because of employer sponsored 401K). Is it possible for us to put money in Roth anyway, not take tax advantage now but have money grow tax free?

Thanks for your responses in advance!

[MDM]

stupendous_stash, welcome to the forums.

Based on the chart below, if in 2007 you had said "I'll wait a couple of years" then you could have bought in 2009 with great results.  Subsequent to 2009, anyone who has waited for markets to fall back to 2009 levels has missed large gains.

Of course, markets could fall below 2009 levels next week - or recover and continue to hit new highs.  The choice is yours...good luck!

To your Roth question:  Yes - see http://www.bogleheads.org/wiki/Backdoor_Roth_IRA.

[Khan]

You don't have to invest -all- your 150k that is on the sidelines tomorrow. What you can do, is add it in over the course of 1-2 years.

Can a market crash happen after all your money is in? Yes. But over the long run, you'll come out ahead investing your money over -not- investing it.

I'd read Stocks for the Long Run, because it has passages in it about time to recovery during previous market crashes, one of the standout lines of which that has stuck in my head, is that during the 1929 crash, if you had invested your money the night before, you'd be back in the black on an inflation adjusted basis after 15 years. On the one hand, 15 years is a long time, but on the other, after that you start coming out seriously ahead, and if you never invest, then you never reap the rewards.

[surfhb]

Dont wait at all

I assume youre just starting to invest?   If so,  a major stock market crash like the one in 2008 would be a gift from heaven  !!

http://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/

[Eric]

Surely you can't do worse than Bob, and he did okay

http://awealthofcommonsense.com/worlds-worst-market-timer/

[sublime9528]

Investing all you money now in a lump sum vs. averaging out your investment contributions over time hinges on two thing. 

1) Historically, lump sum investing is more likely to produce higher returns because you have more money in the game for longer.  The possibility that a crash comes the day after you invest everything is part of the risk you take.

2) The psychological component.  If you're really worried about a crash coming right after you invest everything, and especially if you're worried that you'll back out of the market after a crash and sell low, then averaging your investments over time may be the right move. 

Regarding the issues of going in with a certain allocation and planning to change that allocation based on a crash - I don't think that's a good idea.  You should pick an allocation that is right for you and stick with it.  If you want to be 50/50 stocks/bonds, then stay with that.  If you want to be heavy on stocks, then do that.  But don't plan on switching your allocation around depending on the market.  That is market timing and is bound to fail. 

[Heckler]

Surely you can't do worse than Bob, and he did okay

http://awealthofcommonsense.com/worlds-worst-market-timer/

So, I'm a full believer in buy and hold, but have been progressively moving from one high stupidly high cost provider to a lower cost provider, and now have finally set myself up with Vanguard as the lowest cost provider.  I'd love to finally be able to buy and hold in my personal account.  My RRSP account has moved through four providers in the past 10 years due to employer changes.

However, I'm hesitant to sell Canadian equity funds which have lost me 4-7% in the last 6 months of owning them just for the sake of changing them from 0.55 MER to the 0.16 MER of VCN.  I'm thinking I'm better off holding them till they rebound at least to a no loss situation. 

Same with my S&P500 index fund with 0.35 MER and 3.9% November return, compared to my pittance of VUN (total US market) with 0.17 MER, but only a 2.7% November return - VUN fees may be lower, but so was the return in the same month.

thoughts?  facepunches?

[MDM]

However, I'm hesitant to sell Canadian equity funds which have lost me 4-7% in the last 6 months of owning them just for the sake of changing them from 0.55 MER to the 0.16 MER of VCN.  I'm thinking I'm better off holding them till they rebound at least to a no loss situation. 

Same with my S&P500 index fund with 0.35 MER and 3.9% November return, compared to my pittance of VUN (total US market) with 0.17 MER, but only a 2.7% November return - VUN fees may be lower, but so was the return in the same month.

thoughts?  facepunches?

Agreed, one should always hold the fund that gives the best total return including the effect of fees.

The only problem is knowing ahead of time which fund that will be.  I haven't solved that problem....

[DrF]

Surely you can't do worse than Bob, and he did okay

http://awealthofcommonsense.com/worlds-worst-market-timer/

What a fantastic article. Buy and hold. Above all else save your money!

[GemJedi]

Like you I am all cash right now waiting for the crash as an entry point. I sense we are beginning to see the cracks forming in the long time upward trend.  Professionals are taking money off the table to take stress free Christmas vacations.  Thin trading can make a downward trend accelerate quickly.

I suspect that low gas prices are going to lead to credit defaults from countries/producers that took loans based on revenue at $100 per barrel and will have a tough time repaying with revenues at $50 a barrel.  Remember in 1998 when the credit markets seized up after Russia defaulted on its bonds and dragged down Long Term Capital Management?  The default wasn't really that large from what I recall but because of counter-party risks and leverage no one trusted anyone. That could happen again I think with oil where it is.

So I am quite content to sit and wait. And if it doesn't happen, we still have our money.

[johnny847]

Surely you can't do worse than Bob, and he did okay

http://awealthofcommonsense.com/worlds-worst-market-timer/

What a fantastic article. Buy and hold. Above all else save your money!

I love showing this article to people who are hesitant about investing. As long as one doesn't panic, one will do just fine!


There's a saying on the Bogleheads forum. It's not about timing the market. It's about time in the market.
Nobody knows if the market will correct soon or if it'll be years from now. But statistically, more time in the market is better, and since we don't have crystal balls, the best we can do is rely on such probabilities.

[waltworks]

If you are extremely risk averse, you might want to just DCA, or at the very least consider non-stock investments. Your "wait for a crash" strategy is statistically a losing one.

-W

Like you I am all cash right now waiting for the crash as an entry point. I sense we are beginning to see the cracks forming in the long time upward trend.  Professionals are taking money off the table to take stress free Christmas vacations.  Thin trading can make a downward trend accelerate quickly.

I suspect that low gas prices are going to lead to credit defaults from countries/producers that took loans based on revenue at $100 per barrel and will have a tough time repaying with revenues at $50 a barrel.  Remember in 1998 when the credit markets seized up after Russia defaulted on its bonds and dragged down Long Term Capital Management?  The default wasn't really that large from what I recall but because of counter-party risks and leverage no one trusted anyone. That could happen again I think with oil where it is.

So I am quite content to sit and wait. And if it doesn't happen, we still have our money.

[MikeBear]

Waiting to invest is not the way to go. I opened a Roth IRA with Vanguard the first week of September. Put $6,500 into VGSIX. Even with the many roller-coaster up and down days lately it's had from then until now, I'm still UP around 6.7% for 3 months.

Where else are you going to make those kind of returns? I'd have made about .2% in my "high-yield" bank account for the same period of time.

[GemJedi]

If you are extremely risk averse, you might want to just DCA, or at the very least consider non-stock investments. Your "wait for a crash" strategy is statistically a losing one.

-W

It is statistically losing unless you pick the time when the crash happens. 

[MDM]

It is statistically losing unless you pick the time when the crash happens.

In much the same way that "buying lottery tickets" is statistically losing unless you pick the right numbers.  The odds aren't quite as extreme with market timing as they are with lottery tickets, but...gotta go with W on this one.

[larmando]

Just balance your allocation properly and not by recent history and you'll do fine.

[waltworks]

Ok, keep that money under the mattress. You might pull it off! The odds say all the folks who have been simply putting money in when they have it will beat you, though.

-W

If you are extremely risk averse, you might want to just DCA, or at the very least consider non-stock investments. Your "wait for a crash" strategy is statistically a losing one.

-W

It is statistically losing unless you pick the time when the crash happens.

[Khan]

If you are extremely risk averse, you might want to just DCA, or at the very least consider non-stock investments. Your "wait for a crash" strategy is statistically a losing one.

-W

It is statistically losing unless you pick the time when the crash happens.

Except the same people who are too scared to invest because "a crash might be just around the corner" are almost definitely the same people who will be too scared to actually invest when blood is in the streets.

[GemJedi]

If you are extremely risk averse, you might want to just DCA, or at the very least consider non-stock investments. Your "wait for a crash" strategy is statistically a losing one.

-W

It is statistically losing unless you pick the time when the crash happens.

Except the same people who are too scared to invest because "a crash might be just around the corner" are almost definitely the same people who will be too scared to actually invest when blood is in the streets.

This is like a game of post office. The original point was not about fear, it was about market timing your entry point given that the investor might suspect an upcoming market correction given their current analysis of the market. Then someone shorthanded that sentiment to being scared to invest now, then someone made an equivalence argument about a scared investor not being suitable for investing in a scary down market.

If you have $150,000 sitting on the sidelines, you can't argue that buying 1,500 shares at $100 per share is better than buying 1,666 shares at $90 per share. Once the price goes back up to $100, you have made $16,660 or over 11%. Yes, there is the risk of the market going the other way and getting away from you, a lost opportunity. But in that case you still have your money.

[stupendous_stash]

Thanks everyone for all the posts. I have learnt more in this one post than in a month of doing research myself. This is really very knowledgeable community!

Backdoor Roth is exactly what I was looking for. Seems like a straight forward strategy.

Eric - article about world's worst market timer is really insightful. Though more surprising (shocking, even) is this one : http://awealthofcommonsense.com/bought-near-market-bottoms/
So even if you did succeed in predicting market bottoms, it doesn't help!

Thanks.

[johnny847]

Eric - article about world's worst market timer is really insightful. Though more surprising (shocking, even) is this one : http://awealthofcommonsense.com/bought-near-market-bottoms/
So even if you did succeed in predicting market bottoms, it doesn't help!

That's a pretty cool study. Thanks! One to add to my mental database of articles to show to people to encourage them to start investing.

[GemJedi]

Stuck a toe in today.  Bought some battered big oil.

[Scandium]

Like you I am all cash right now waiting for the crash as an entry point. I sense we are beginning to see the cracks forming in the long time upward trend.  Professionals are taking money off the table to take stress free Christmas vacations.  Thin trading can make a downward trend accelerate quickly.

I suspect that low gas prices are going to lead to credit defaults from countries/producers that took loans based on revenue at $100 per barrel and will have a tough time repaying with revenues at $50 a barrel.  Remember in 1998 when the credit markets seized up after Russia defaulted on its bonds and dragged down Long Term Capital Management?  The default wasn't really that large from what I recall but because of counter-party risks and leverage no one trusted anyone. That could happen again I think with oil where it is.

So I am quite content to sit and wait. And if it doesn't happen, we still have our money.

"sense", "suspect", "I think"...
With a splash of conjecture and hypotheticals. Not a good basis for investment decisions.

And you won't have your money, you will loose it to inflation. Not to mention loosing the 14% year to date return of the S&P! If you need to "have your money" right now you shouldn't be investing it anyway

[Pooperman]

The best method is to put your money in at the bottom of the market every year in lump sum. Since you can't predict that, you can get arbitrarily close by doing lump sum at the beginning of the year which is a bet that the beginning of the year, on average, is when the lowest point happens to be. Why? If markets tend to be exponentially growing with time, then the beginning (with variance of course) will be where the low point is more often than not. If the markets were shrinking, the best time to put money in is at the end of the year assuming the markets would come back at some point in the future. Dollar cost averaging makes you feel good, but it's not the most efficient one. It gets you close to the average price for the year (or is it median if you're putting in a constant amount?).

[RapmasterD]

I have been following MMM for about a year and have seen the market (S&P 500 - SPY) go up by about 14% in this timeframe.

There were a lot of folks posting on this forum a year ago with their incessant talk about waiting for the next crash, given the steep increase in SPY during 2013.

The next crash is a guarantee. The timing of the next crash is a complete guess.

Dump it in, baby! But don't take my word for it. http://www.bogleheads.org/wiki/Dollar_cost_averaging

P.S. Also, just look at a chart. The S&P 500 basically treaded water for 13 years (2000 to beginning of 2013). All the meaningful gains -- those RECORD BREAKING HIGHS you read about on Yahoo Finance - have happened in the last two years, coming after 13 years of...nothing (i.e., S&P 500 at 1500). Don't read Yahoo Finance. But by all means use their awesome charts.