Should I wait for the market to go down before choosing to invest?
I have cash that has been sitting in a savings account earning nearly 0% interest, but the market is at an all-time high. Should I wait for the inevitable downturn to invest?
You’re describing market timing. We’ve all heard the common refrain of buying low and selling high. It’s easy, right? Sadly, like most conventional wisdom, that strategy overlooks important nuance. To win the timing game, investors need to guess both the right time to get in and the right time to get out. But here’s the catch, markets are fickle and ultimately unpredictable. Every data point on the planet may suggest a stock will soon fall, but an irrational market may decide otherwise. Worse, the entire market could move in the opposite direction of sentiment. Remember when people said the market would nosedive if the U.S. elected Trump?
To your point, historical averages suggest we are “due” for a recession. However, the market may very well continue upward. Meanwhile, inflation could continue to erode the purchasing power of the cash you leave in the bank. Ask yourself, how much does the market need to drop before you jump in? Is it 5 percent, 10 percent, 20 percent, more? It’s impossible to determine the exact bottom of the market.
At near-record market highs, someone that can’t emotionally withstand a sudden drop in portfolio value may consider a dollar cost averaging approach to entering the market. The downside to this approach is the opportunity cost of not putting all of your dollars to work. But strategy must depend on risk tolerance, liquidity needs, time horizon, etc. Regardless of how and when investors enter the market, we suggest people build diversified portfolios and maintain a long-term mindset. (For more, see: “Coaching Clients Through Financial Planning: How Advisors Add Value By Managing Behavior”)
The odds of the stock market being higher one year from now are the same whether we're currently at a record high or not The market pull back you are waiting for will happen at some point but it might fall back to a point that is higher than we are today. As long as you don't have an immediate need for the money you're investing, then you will likely experience growth if you invest in a diversified portfolio.
Attempting to "time " the market is not a winning strategy . If you are planning to be in the market for many years , you can Dollar Coast the invetsments. Spread the purchases over months when the market is down your investment dollar will buy more shares. When the market is up you will buy less shares. The key is to have an investment plan to match your goals .
That's a very common question. And one I hear every single year, especially since 2012. The problem is that since bull markets go longer and farther than most people imagine, there's no telling if you wait and end up buying at much higher levels than today. While there are many DNA markers which are almost always present before a bear market begins, they are not present today.
You can certainly dollar cost average your way into stocks but investing a certain amount of money each and every time interval, weekly, monthly or quarterly. At higher prices, you will buy less shares while at lower levels you will buy more shares.
You can also find investments which have lower volatility than the overall stock market. Additionally, you can invest in "balanced" ETFs or mutual funds which have both stocks and bonds.
Your question illustrates the difference between two forms of investing, dollar-cost averaging (DCA) and lump-sum investing (LSI). As outlined in a Vanguard white paper, “On average a LSI approach has outperformed a DCA approach approximately two-thirds of the time, even if results are adjusted for higher volatility of a stock/bond portfolio versus cash investments.” The reason for this is that the longer dollars are invested in the market, the longer they have to compound.
If you are confident in your portfolio allocation, understand your investment time horizon and are seeking the potential for maximum returns then you should put your dollars to work as soon as possible. If you are more concerned with loss avoidance and avoiding feelings of regret, then a DCA approach may be more appropriate. If you choose DCA however, be aware that you are likely reducing your potential future returns for short term piece of mind, which actually is likely not that big a deal.
Also, it is impossible to consistently and perfectly time the market and trying to do so can have severe consequences. The annualized total return of the S&P 500 Index from January 1996 to December 2015 was 8.2%. If you exclude the 10 best performing days, during the entire 20-year period, the annualized return drops to 4.5%. And if you missed the top 40 days, again during a 20-year period, the annualized total return drops to -2.0%! The moral of the story is to determine your risk profile, allocate your investments, and get started.