How to choose when to buy mutual fund index stocks?

[TopHatFox]

I do not think the efficient market hypothesis is 100% true (I like the weak form), and I'm wondering what the best timing to purchase mutual fund index stocks is, particularly VTSAX? https://www.google.com/search?q=vtsax+q ... e&ie=UTF-8

At the moment, I have another 7K I'd like to invest in a total US stock market index, but the price keeps going up every day >:(! Ideally I'd like to wait until the next down-turn and buy in bulk then. Is there any detriment to waiting on the sidelines until that point? I suppose there's the occasional dividend that VTSAX throws out every quarter, but the next one isn't until ~September.

This means I have a few months to wait for a downturn to purchase 7K worth of shares before the next dividend, right? And then, how long should I wait to purchase at: 10% decline, 20% decline, 30%? I imagine the lower the better since I'd get more shares for the same dollar; the balance of course being that keeping money un-invested means it gets reduced in value by inflation over time.

[Scott 2]

IMO just starting out, pick an asset allocation, throw your money in, start dollar cost averaging and rebalancing periodically.

You'll get a much higher return on your time trading it for other people's money, than trying to optimize an investment strategy.

You also need to learn how you respond when the whims of the market cause you to lose a bunch of money in a short period of time. Can you handle a $1k drop? $10k? 100k??? That will inform your strategy, and you can only learn it through experience.

[TopHatFox]

Let's see, my current asset allocation is 100% total broad blended US stocks w/ a nominal 6 month emergency cash fund in a checking account, combined with wide life flexibility and youth. At the moment, I can handle any kind of short-term valuation change in the portfolio, whether 1k (done it before), 10k, or 100k (might have to save some more for the latter two haha). I imagine it'd rebound in a few years time at most.

Interestingly, what if one had, let's say, 100 shares for 100k (for simplicity) , sold them--waiting until the market tanked 30% in a few years time-- then bought 130 shares for the same 100k. These 130 shares would then likely rebound to their original price and give you 130k. Wouldn't this be a pretty good way to get more shares for the dollar? It's almost inevitable that the market will tank every few years, too.

[fiby41]

I'd also be grateful if more forum members would share their thoughts, point of view and how they use mutual funds here.

[Scott 2]

You might consider using the new money to establish a more diverse asset allocation. I certainly wouldn't want to be almost 100% allocated to US stocks.

Learn a little about asset allocation:

https://en.m.wikipedia.org/wiki/Asset_allocation

Optimizing what to buy and when is the whole challenge. Everyone has an opinion on how to do it.

I just buy some of everything according to my asset allocation, when I have money, cause I'm lazy. It's definitely not optimal.

[jacob]

@Zalo - Imagine this very equivalent question:

"I do not think my third molar is 100% healthy, and I'm wondering what the best timing is to fix it myself, particularly using "Dr Vanman's One-size-fits-all Dentist Surgery Kit".

At the moment, I have another 7K I'd like to spend, but the price for the kit keeps going up every day >:(! Ideally I'd like to wait until the pain goes away and operate then.) Is there any detriment to waiting on the sidelines until that point? I suppose there's the occasional antibiotic that the surgery kit allows you to eat every quarter, but the next one isn't until ~September.

This means I have a few months to wait for a chance to operate before I can take another antibiotic, right? And then, how long should I wait to operate at: 10% pain, 20% pain, 30%? I imagine the higher the better since I'd get rid of more pain if I do operate; the balance of course being that keeping my tooth, the pain it gets reduced over time as I get used to it."

Not to be too flippant in my response to your question but people generally take about two years of full time effort and concentration before they develop enough of a sense to be able to consistently time TSM level instruments---and that's just the 10% of people who seem to have the X-factor to make it. And once they do develop this sense, a mutual fund would be just about the worst tool to do it with.

Put it another way, much as I guess that successfully describing in one paragraph or post where and how to find and dig out a particular rock sample while specifying the preference for using a tablespoon, answering how to time the market with mutual funds ... is just as hard.

[black_son_of_gray]

@Zalo: from your OP, you seem to be entirely fixated on price of an index fund. Why is that? Better to be concerned with how much you reason the underlying securities are worth and their reasonable prospects for your time frame*, and then buy when the price looks good in that context - not some blanket % drop**.

*This is the hard part and why investing can be grueling.
** If you are very good, you might be able to read certain % drops into the technical trading space/investment psychology and make some correct calls.

Regarding your statement about inflation: nothing loses money like a bad investment at a bad time, so I wouldn't worry so much about inflation. You have years before your inflation loss equals a few days work. Central banks all over the place are trying to inflate money but can't achieve more than ~2%, no?

[Gilberto de Piento]

https://www.bogleheads.org/wiki/Boglehe ... the_market

Most people are better served by maximizing income and minimizing expenses than trying to time the market.

I certainly wouldn't want to be almost 100% allocated to US stocks.

I agree, you should consider being more diversified.

[BeyondtheWrap]

A big problem with waiting for a downturn is that the market still goes up in the long run. By the time the next downturn occurs, the downturn price could be higher than it is today, so it only makes sense to wait if you think the downturn is coming soon.

Example: During the early '90s recession, the price for S&P 500 was close to $300. As the '90s went on the price went up and up, particularly during the late '90s, and in year 2000 it peaked around $1500. Then the early '00s recession happened and it bottomed out in the $800s. This was more than twice the price during the previous downturn. So if you had started saving in 1992 and planned to wait for the next downturn, you would have been waiting a very long time, and you would not have been able to buy as many shares as you would have if you started investing right away.

[TopHatFox]

I certainly wouldn't want to be almost 100% allocated to US stocks.

I agree, you should consider being more diversified.

While I hear that being diversified is good, I think I already am diversified to what I need to be; feel free to disagree and mention why. I am using Boggleheads method of investment combined with what JL Collins writes in his Stock Series. I'm also using all of the minimizing expenses/maximizing income strategies learned on this forum and books.

Since I am young at 22, and stocks have historically been the fastest way toward financial independence once the expenses/income portion is taken care of, I will be using 100% VTSAX until I am living off my portfolio at around 500k of $ in VTSAX in 5-10 yrs time, at which point I'd switch over 30% to VTBLX. Expenses would stay at around 7k/yr. My biggest concern/liability is potential medical expenses if I get hurt while full-time adventure travelling after FI.

VTSAX is diversified domestically since it offers over 3000 small-cap, mid-cap, and large-cap US stock shares, and internationally since many US companies are already abroad, owning large portions of international market share. The expected "Target Retirement Fund" for my age range is 90% Stocks 10% Bonds, so I'm not far off from this asset allocation.

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While I definitely agree that working to make more money is a better strategy at this point in my game, it's hard for me to make more money at the moment because college students are basically not thought of as much better than high schoolers, worth $10-11/hr (unless they do engineering or comp sci, which I do want to do). I'm already working 50 hr/week over the summer; I'll (work to) get paid much more once I gain job + graduate next year. I simply figured I'd ask the pitfalls and potential benefits of timing mutual fund purchases.

[BRUTE]

that the market still goes up in the long run

or it doesn't

[Scott 2]

Buying only us stocks is like eating only beans. Diversifying asset classes raises your expected return. The key is in rebalancing to your target asset allocation on a regular basis.

If you expect to retire in five or ten years, and live on those assets, your time horizon is 5-10 years. It's like you're 55. Then you have a portfolio that needs to last 50+ years. Both of these will lower a perfectly rational investor's risk tolerance, and yes, at the cost of a lower overall expected return.

The vast majority of your wealth in a 5-10 year time horizon will come from money saved anyway. Assuming your income follows a traditional growth pattern, most of that will come during the second half of the time window. So the reduced return from a more conservative risk tolerance has a very limited impact.

[TopHatFox]

@Scott 2, good points. The point on being "55" rather than "22" puts Vanguard's 20-30 year old 90/10 expectation more into perspective. Perhaps I'll add VTBLX bonds now after all.

Some counterpoints/questions: What if I want to maximize returns (I do want to arbitrarily be a millionaire by say, age 40, after all ) and I am willing to pay for the 100% Stock volatility via lifestyle flexibility and the relatively larger buffer that 500k already would be? Also, VTSAX offers 2% dividends, which at 500k is 10k (this would pay for my living expenses already). This means I could just continue to keep my $ invested in VTSAX without ever touching the growing principal (this does still leave the portfolio vulnerable if something severe happens to US stocks of course).

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I found a target date asset allocation on Vanguard's web site, the allocations do seem conservative (of note, they are designed for people that only need the portfolio for ~30 years): https://investor.vanguard.com/mutual-fu ... rview/0303

10 Years: 65% Stocks 35% Bonds
5 Years: 58% Stocks 42% Bonds
FI: 47% Stocks 53% Bonds

[Scott 2]

You're mixing two distinct topics.

Diversification is smart regardless of your risk tolerance. It increases expected return at the same level of risk.

What you hold to create that diversity is a personal choice. I've gone with target retirement funds, with increasingly aggressive risk profiles in my most tax protected accounts. I also own a home. I am a lazy / dumb investor.

Your risk tolerance is based upon your investing goal. It will change over time.

Maximize return or to be a millionaire are kind of meaningless goals, because they ignore time.

At some point you want to take out what you put in. When that will be, and how you expect to do it, informs how tolerant you are to risk.

Keep in mind - investing is not a contest. You don't win by getting the highest return or the biggest pike.

[BlueNote]

@Zalo: I agree with the advice of investing in an asset allocation that you think works and don't sell unless it's part of your withdrawal or rebalancing programs. If I were you I would be investing, as a one time lump sum ASAP, in something like the VT ETF to get international diversification and a home country aggregate bond fund (if you want to smooth the ride). If you're wanting to wait for a market crash it could be because you don't like the risk of the market crashing, If that's the case then I suggest increasing your bond allocation until the the prospect of a market crash doesn't generate urges to time the market. There are other rational strategies as well but that's just my preference. Unfortunately as someone mentioned the next crash bottom could be at a higher price then the current price of the market so waiting could be detrimental. You'll likely need to experience risk first hand to really know how risk averse you are, this could be a great opportunity!

[BRUTE]

also, Zalo's talking about 7k. that's not nothing, but in the grand scheme of things, Zalo will save a multiple of this every year once he graduates and gets a job. even if he loses it all in a market crash tomorrow, that's peanuts compared to a daily market swing at Zalo's retirement goal of 500k in 5-10 years. it's 1.4%. that's not a slow day, but also not a very noteworthy day.

brute wouldn't worry about it too much.

[The Old Man]

Minimum buy-in for a Vanguard fund is $3K. For an Admiral-status fund the buy is $10K. You only have enough for one fund. I would suggest Total World Stock as it is a world stock fund (~50% USA). Once you have more than $10K, then you can diversify into more funds.

Also, not withstanding the long term track record of stock funds, please keep in mind that past performance is no guarantee of future performance in the short term (or long term). We are in a very unusual environment with a negative interest rate environment for ex-USA and very low interest rates in the USA. I am not sure what it means, but it seems to point towards deflation which is bad for stocks. Bonds work well in a deflationary environment.

[FBeyer]

You don't lose anything in a market crash unless you start selling. Money is made when you buy.

[GandK]

@Zalo

How often market corrections of 5%, 10%, and 20% tend to occur.

So... not very.

It's true that if you timed the market perfectly every time, timing the market would move the needle significantly. But given the above numbers, how likely is that?

I wouldn't bother with these maneuvers. If people who have been PhD-level educated on this stuff and have done it professionally for decades can't predict the markets consistently, what chance do the rest of us have?

[jacob]

If people who have been PhD-level educated on this stuff and have done it professionally for decades can't predict the markets consistently, what chance do the rest of us have?

I bet that was rhetorical 0%, but the actual answer is about 10%. Advanced degrees and professional experience are neither a required nor a sufficient condition.