Is now the wrong time to buy an index fund?

[workathome]

Assuming you have nothing invested, and you'd like to set up a permanent portfolio with an index fund allocation, is it better to wait for another recessionary dip, or assume the money printing wont stop anytime soon and to buy in before equity prices get further inflated?

This chart has me concerned:

http://www.advisorperspectives.com/dsho ... he-SPX.php

[secretwealth]

Those who advocate index fund investing do so because they believe you can't time the market, and index investing is something you can earn a return on consistently in most economic environments.

However, I don't advocate index fund investing and I think the "you can't time the market" theory is bullshit.

[workathome]

Thanks secretwealth.

To further expand the question:

Assuming you had your entire ERE net worth available, with nothing invested, would you put 25% in equities now to start collecting dividends, or would you wait for another significant dip?

This is sort of the same question as "should I sell everything now and try to time the market", but not exactly, because no gains would have been had from past investments costing taxes.

[dot_com_vet]

Maybe it's the right time, maybe not, nobody knows. If you feel more comfortable, dollar cost average in over he next X number of months.

I've read that a study showed a lump sum investment generated more returns than the DCA method, but you have to be comfortable. Personally, I DCA even though I know I will likely earn less.

[workathome]

DCA seems good, perhaps with a hard limit of 15-20% of net worth? I'd like to have cash ready to pick up stocks on margin cheap in another crash scenario. Any thoughts on margin debt reaching 2007/8 levels again? It appears correlated quite closely to bubble-highs and the following crash.

[KevinW]

One of the basic ideas of the PP is that it is impossible to predict macroeconomic moves and so it is impossible to predict what is going to happen to the 4 PP assets. By design, at all times at least one asset is going to look overvalued. That's why you have four of them. So if you want to implement a PP I recommend that you go all in at once and try to stop thinking about what's going on with the individual assets. Your time and energy is probably better spent finding more money to put into the PP.

[workathome]

Thanks Kevin.

Let's assume though I'm retired. I have enough for a 4% SWR and have no plans to earn additional income.

Do you have no opinion on the margin debt graph?

[KevinW]

There are plenty of fundamental indicators that the stock market is overvalued right now. The problem with those indicators is that they do not provide enough information to be actionable for trading. In order to execute a good trade you need to know the exact moment to buy and the moment to sell. You can be right about the fact that the stock market is due to crash but wrong about the tactical timing and lose money as a result. IMO the only solution is to use an investing system that holds a static target asset allocation regardless of what is going on in the markets.

Also IMO the PP can safely support a 3% withdrawal rate but I'm not so sure about 4%. I'm targeting 3% before I declare FI.

[tylerrr]

I would just DCA into the PP each month over the next 2-3 years. Every month, just buy exactly 25% of each 4 parts.

That way, you're playing it safe and you will automatically take advantage of any dips that might occur in any of the parts.

And yes, I'm convinced the stock market is due for a crash. So just DCA over the next 2-3 years each month and you don't have to worry about it too much at all.

Look at the 30 year track record of the PP and that should keep you pretty confident you won't lose too much in very down years.

Personally, I am DCA into SLV and maybe GDX in addition to DCA into a traditional PP.

[leeholsen]

yes, i would not advise buying a stock index fund now.

1. stock mkt is overvalued. it went up 15% this yr, do you really expect a 30% return now when you can see that europe, china and japan are all slowing economically ?
2. now the fed is putting in 85 billion each month, put if you look over time; they have been getting less bang for their printing buck each yr.
3. we also have a debt cieling debate coming up in august. last time that happened; the stock market dropped; i'm expecting that again.

-my advice is just to put that in a savings or money mkt account. IMO and i think the opinion of the majority here is not to become ERE by timing the mkt but by saving up a big pile of money by cutting your spending.

i subscribe to my local houston financial show's - streetalklive.com newsletter. if you read those weekly, your economic knowledge show skyrocket imo.

[Chad]

You can't suggest timing the market with the first part of your comment and then say not to do it in the last part of your comment.

And, I'm fine with timing the market, but it should be done right.

Yes, buying and holding a US index fund at this time does look like buying near the top, but buying something else that is down (emerging market fund, etc.) might not be a terrible idea.

[leeholsen]

i'm not suggesting timing the mkt, i'm suggesting playing the percentages.

china, japan and europe are all slowing economies, quantative easing has shown to be lesss and less effective and the US shows signs of slowing; i'm not expecting the merket to go up another 15% this year facing this and another debt cieling debate.

all the signs point to a flat to declining mkt over the next 2 months and if youre an EREer like me, you would want to conserve your savings and wait for a better buying opportunity than risk your savings and put becoming a fulltime ERE farther away.

[Chad]

I'm not arguing your reasons why, but that you think this isn't market timing. What would be your definition of market timing if this isn't it?

[tylerherman]

If you're investing in index funds the timing doesn't matter. Just put money in each month and forget about it.

With that said, there are other bargains out there if you are concerned about the market being high.

Look into smaller index funds, such as sector funds. Not all, but some sectors are down right now, or at least not at all time highs.

[workathome]

Tyler - you're talking about Dollar Cost Averaging, which is a form of hedging against market fluctuations. The problem with DCA is it implies that it is successful because timing does matter, you want to spread things out so you are able to save money during lower market points.

In this particular case, I meant all the money is available and not invested. There wont be more coming in the future. So IF I'm going to time it, I wonder if waiting for another major recession is better. In theory it could work like this:

Invest now: 5 more years of 10%/year gains, on year 6 there is a 50% drop in all holdings (meaning I break even)
Time the market: Wait 5 years to invest funds. Pick up stocks at a 50% discount and earn a 80% ROI within the following 2 years.

[Chad]

@tylerherman
Your definition of market timing is all I am really interested in. What is it?