would the stock market stop going up already?

[cats]

...or, where to put your money when it seems like it's a bad time to buy everything?

I've been building up a stash pretty steadily since my early 20s and started investing a few years ago, mostly in the form of maxing out a Vanguard Roth IRA.  Recently, I've had much more money available to invest, and have decided I should get "smarter" about it.  My first move was a decision to switch my investment approach from dollar-cost averaging to value averaging.  This seemed like a no-brainer, no-risk way of increasing my returns.  Score!  However, the stock market has just been doing too darned well over the past few months (and P/E ratios are largely way over historical average) and the result is no money put into equities.  I was also thinking it was perhaps time to diversify my portfolio with bonds, but everything I'm reading/researching indicates this is not the best time to get into bonds either.  Result: money is piling up in my "high interest" (ha,ha, HA) online savings account.  While this is better than buying overpriced stocks, it also makes me itchy to stick it into something else.

I am thinking maybe it's a good time to start investing in European markets...they seem to be in a bit of a decline, but surely must come back eventually? 

Are there "good" options for investing right now?  What do you think? 

[arebelspy]

What's your accumulation time frame? 

I'd say just start to dollar cost average.  It'll go down, and you'll get more cheaper then.  It'll go up, and you'll buy more expensively.

But if you're on a 10 year horizon or more, just start dollar cost averaging and ignoring whether it's up or down.

Seriously.

Stop looking at what it's worth.  Invest and ignore.

YMMV, this is what I'd recommend for most people, but may not apply to you.

[Mr Mark]

You're right, it seems risky everywhere!  :-)

But the cash in the world - and world gdp and asset values have to go somewhere.
Dollars never die.

So where can it go?

1/ cash or v liquid instruments. This, as per supply and demand, lowers interest rates and increases the price of bonds

2/ buy stocks - but then someone else has that cash, and faces the same problem!

3/ buy stuff to own. Land, houses, commodities - and again see 2/

4/ buy stuff to invest - this grows the economy, new stuff gets made

5/ consume.

6/ inflation

What will the future combined forces do over the next 30+ years?  Who f**kin knows. But I
will assume -

World GDP will increase, in real terms. Eventually.
No new land is being made, especially good beach front, attractive down towns, and fertile water rich farmland.
There will probably be some inflation in fiat currencies.
People will find a way to eat, sleep, drink, and be entertained.


You can therefore only diversify, on a risked basis. Dividends are good. Local real estate. Quality assets sold in distress.
80/20 stocks to bonds. REITS. Precious metals and art if you want. Local cash flow driven businesses.
Emerging markets. Europe. Wherever the self serving media pundits are telling you NOT to invest. Common sense. Low-ish debt, <30% net leverage. Tax efficient. Cash flow and productive assets.

Doing this is not easy, but it isn't complicated. And it gives you the highest chances, long term, IMHO.

And every now and then, I play poker, generally making reasonable money, with a stake of... hmmm..  1/3000 th  of the stash.

Don't panic. Minimise fees. Do the other stuff, like flexing those MMM muscles!

[arebelspy]

One other comment with relation to cash strategies.

One common idea in retirement is to have a cash "buffer" (3-5 years) that you can draw down from when the market goes down.  Then you don't have to sell low because you need living expenses, but can rely on that cash, wait for the market to go back up before selling.  Makes a lot of sense, in theory.

Studies have actually shown, however, that this strategy under performs just investing the money and selling low sometimes, due to the low return the cash gets while sitting there.

There's a similar effect when in the accumulation phase.. while sitting waiting to invest and not earning anything, you're actually coming out behind than if you just invested (and collected dividends, etc.) 

Most studies show that market timers trying to buy on dips and sell on peaks badly lag the market as a whole in returns.  Don't be one of "those guys."  ;)

Keep in mind the market grew 3 or 4% during the last flat/"lost" decade due to dividends, so being invested, even during the ups and downs, is useful.

EDIT: http://www.evansonasset.com/index.cfm?Page=90

We know we can value equity markets based on fundamentals, but we can't time them. So, what's an investor, particularly one with a bearish view on equities, to do? One study found that dollar-cost averaging (DCA) over a 6 month period decreased returns about 1.11% on average for all 6 month periods from 1953-1996, outperforming a lump sum strategy in the majority of cases where markets declined, but came out 5% or better than a lump sum strategy in a only a minority of cases. DCA over a 12 month period worked better, costing 2.50% in returns but beat lump-summing in 100 of 114 instances, and beat it by 5% over half the time. DCA for 18 and 36 month periods cost more and added little value. These calculations, however, don't include what appears to be an equity bubble period from 1996-2002, where staying out or getting into equity markets had far larger effects on returns.

DCA and forget it, you'll come out ahead.  Especially over the next decade.  Don't fret if you look six months from now and it's down, be happy that it's on sale!  (And it may well be up, and you'll be glad you haven't been sitting on cash for six months.)  KISS

[jpo]

EDIT: http://www.evansonasset.com/index.cfm?Page=90

We know we can value equity markets based on fundamentals, but we can't time them. So, what's an investor, particularly one with a bearish view on equities, to do? One study found that dollar-cost averaging (DCA) over a 6 month period decreased returns about 1.11% on average for all 6 month periods from 1953-1996, outperforming a lump sum strategy in the majority of cases where markets declined, but came out 5% or better than a lump sum strategy in a only a minority of cases. DCA over a 12 month period worked better, costing 2.50% in returns but beat lump-summing in 100 of 114 instances, and beat it by 5% over half the time. DCA for 18 and 36 month periods cost more and added little value. These calculations, however, don't include what appears to be an equity bubble period from 1996-2002, where staying out or getting into equity markets had far larger effects on returns.

DCA and forget it, you'll come out ahead.  Especially over the next decade.  Don't fret if you look six months from now and it's down, be happy that it's on sale!  (And it may well be up, and you'll be glad you haven't been sitting on cash for six months.)  KISS

That's interesting... however, suppose you are maxing out your IRA and have $5000 to invest for the year on January 1. Are you saying it makes more historic/mathematical sense to invest $416 each month instead of just dump all $5k in the market in January? Sure, you may buy high... but ALL your "employees" are working for you ALL year, not just a fraction. And what to do with the 0-$5k that you save up for January 1st of the following year?

[arebelspy]

In an up market, lump sum outperforms.

In a volatile or down market, DCA is better than lump sum.

Yes, trying to guess what the market will be going forward is market timing.  To avoid that, pick one method and stick with it, regardless of what the market is doing.

Similar as to why rebalancing isn't market timing (though it does give you the benefits of buying low and selling high): you do it regardless of what the future is going to be.

To more specifically answer your question: why do you have 5k on January 1?  Why wasn't that invested all along?

To answer what I think the followup question will be for a lot of people: what do you do with a lump sum windfall?  See above, if you think it's an up/flat/down market.  For most people, I'd recommend DCAing, simply because for most people the pain due to a loss is sharper than the gain due to a win, so lump sum and it going up gives less pleasure than the pain of lump sum and the market dropping.  DCA will let most people feel happier with their investment and sleep better.

IMO, YMMV, everyone's circumstances are different, etc.

[jpo]

In an up market, lump sum outperforms.

In a volatile or down market, DCA is better than lump sum.

Yes, trying to guess what the market will be going forward is market timing.  To avoid that, pick one method and stick with it, regardless of what the market is doing.

Similar as to why rebalancing isn't market timing (though it does give you the benefits of buying low and selling high): you do it regardless of what the future is going to be.

To more specifically answer your question: why do you have 5k on January 1?  Why wasn't that invested all along?

Good point, time to open a taxable account, then make contributions from taxable -> Roth in January. I've just been letting it accumulate in my emergency fund all year, whoops.

[arebelspy]

I've just been letting it accumulate in my emergency fund all year, whoops.

Better than not having it accumulate.  ;)

And as the saying about planting trees goes, now is the second best time to invest.

[JohnGalt]

In an up market, lump sum outperforms.

In a volatile or down market, DCA is better than lump sum.

Yes, trying to guess what the market will be going forward is market timing.  To avoid that, pick one method and stick with it, regardless of what the market is doing.

Similar as to why rebalancing isn't market timing (though it does give you the benefits of buying low and selling high): you do it regardless of what the future is going to be.

To more specifically answer your question: why do you have 5k on January 1?  Why wasn't that invested all along?

Good point, time to open a taxable account, then make contributions from taxable -> Roth in January. I've just been letting it accumulate in my emergency fund all year, whoops.

You might want to see what fees + taxes would come out to be with this approach.  Is it possible to transfer the actual assets to the IRA or would you need to sell the assets (pay taxes), transfer, and repurchase?  Maybe a moot point if you're using no fee ETF options with your broker, but worth checking before you start investing just $416/mo at a time. 

[cats]

Interesting replies, everyone!  Seems like the best plan is to figure out the best of the so-so options and start directing money there for now, then reevaluate a bit further on.

For the record, I am not planning to ever bother with trying to "time" IRA investments as there's only a 1 year timeframe to work with.  I just put in $5k as soon as possible each year and then forget about it.

[BryanR]

I have a multi-millionaire mentor in the stock market who is getting 10-20% per year by selling covered calls on many of the things he owns. I began doing the same, and just like that, I'm getting that rate of return now too. FWIW.

[jpo]

You might want to see what fees + taxes would come out to be with this approach.  Is it possible to transfer the actual assets to the IRA or would you need to sell the assets (pay taxes), transfer, and repurchase?  Maybe a moot point if you're using no fee ETF options with your broker, but worth checking before you start investing just $416/mo at a time.

I'm buying ETFs off of TD Ameritrade's no-fee list, so no big deal.

[grantmeaname]

For the record, I am not planning to ever bother with trying to "time" IRA investments as there's only a 1 year timeframe to work with.  I just put in $5k as soon as possible each year and then forget about it.

Alternately, you could just save $416 a month into it and do the rest of your savings into your brokerage account, spreading both of them evenly across the year.

[Sylly]

I think this is sort of related...
I saw this a couple of days ago:

http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

I'm still learning about all these investing bits, so I'm curious what more knowledgeable people think about this chart. Would DCA just lead us to the grey area (4%-ish) of return? But at the same time, if you just take a diagonal line parallel to the left edge, that would simulate deposit and withdrawal over time, there time frames where you end up in the red area (0-3%) of return. The longer the time frame, the more stable the return. But for those of us looking at traditionally shorter accumulation phase, aren't we more susceptible to the up and down swings of the market?

[arebelspy]

That chart is excellent, thanks for sharing it!

Would DCA just lead us to the grey area (4%-ish) of return?

Here's the idea behind DCA: you don't know if you're starting into a green, red, or grey area.  You can't predict the future.  So by averaging in your money, you'll get as close to optimal as you can without knowing that and removing the gambling element (by not investing all of it and risking it being in a red or hoping it's in green.)  A lot of it depends on your withdrawal time anyways.

But for those of us looking at traditionally shorter accumulation phase, aren't we more susceptible to the up and down swings of the market?

No.

If you plan to dump all your money in the market during your accumulation phase, then withdraw it all the day you retire or hit FI, yes.

If you plan on still being invested when you are FIRE'd, no.  For most of us, even if we hit FI in 10 years, we'll be invested in the market for the next 50 or 60 years.  It's irrelevant when we're accumulating or when we're living on it (other than maybe being okay taking a little more risk during the former period), because either way your timeframe is decades.. even if you're only accumulating in the next 5 years.  (Again, unless you withdraw it all the moment you retire.. unlikely, and unwise.)

[arebelspy]

One encouraging thing about that chart.  Look down the left diagonal at the dark red chunks, where investing didn't match inflation.

1930s and 40s is the first part.  Then look at that huge green area in the 50s.

70s, large red, 80s and 90s lots of green.

2000s lots of red.. think we may see some green soon?

A good visual representation of how markets are cyclical.

[grantmeaname]

It's certainly a great way to present that data. The NYTimes graphics team never fails to impress me.

[ShavinItForLater]

I expect the graph is pulled directly from the guy's book (Unexpected Returns).  Without reading the book, I can't tell what assumptions he used, but I would be careful with the data, it does state that it includes:

• Dividends
• Inflation
• Taxes
• Fees

However, it doesn't disclose what assumptions were used for those, and they can all vary a lot on a personal level.  Mustachians in particular might likely have higher than average dividends (for those who target dividend stocks, which it appears many Mustachians do), lower than average taxes, and lower than average fees.

With some quick Googling I find that the average equity mutual fund fees are between 1.3% and 1.5% per year.  I pay between 0.08% and 0.24% for the vast majority of mine, with the overall average around 0.11%, more than a full percentage point lower than the general average, *per year*, so that savings would be compounded over time.

Marginal tax rates can vary widely, some years more than others, but currently income marginal rates in the US range from 0% to 35%, and long term dividend and capital gains rates can be either 0% or 15%--it will be 0% unless your taxable income is over about $35K for a single filer or about $70K for a married couple (meaning that you're in the 25% marginal income tax bracket).  Real investing returns would be based on some combination of the two, since things like IRAs and 401ks would be based primarily on income tax rates, but long term taxable account investing would be based more on capital gains / dividends rates. 

If you are a hardcore Mustachian you would likely fall below the "average" tax level, particularly when you are retired and therefore selling their investments or living off the dividends.  In that case according to current law there would be no taxes, adding back in the 15% (or more) the author likely deducted from the returns in his chart for recent years.  If you use Roth IRAs or 401ks, you would "lock in" your tax rate up front on what you invest, and again have no taxes upon withdrawal, with no taxes at all on the investment returns.

Inflation I would say is a legitimate deduction when talking about real returns vs. nominal returns, so I'll leave that one alone for the most part.  I would say though that your own personal inflation rate depends on what you spend your money on--and with Mustachian techniques I believe you would specifically target your spending on categories and items that have not gone up in cost as much as many things have.

This chart is also based on the S&P500--meaning no international, no small cap, no real estate, no bonds, no commodities, no cash.  According to one site, from 1926-2011, the CRSP 6-10 small cap index had an avg. annual return of 11.3% vs. 9.5% for the S&P500.  What that means though is that a $10,000 investment in 1926 in the S&P500 would have returned a little over $23 million by 2011, but the small cap index would have returned a little over $100 million.  That's not to say you should dump all your money in small caps, but I think having some portion of your funds in other asset classes can boost returns vs. concentrating 100% on one asset class, for multiple reasons.

Overall the point being, take that chart with a huge grain of salt.  What's true on average for the masses is not necessarily true for you.