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Now is a great time to invest - discuss
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18-10-2014 11:58am#1
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I still think a larger correction is not far away, although some oil and car manufacturers are getting my interest.
The investor's dilemma
I'm also apprehensive about this. I'm itching to pour some cash into the S&P 500. During the recent correction, I pumped some cash into the European index (as it fell the farthest), to the extent that I depleted my liquidity. Now the S&P 500 has pretty much regained all of its recent loses, so it seems I missed out on the 7% discount. Pretty bummed. But what if the correction doesn't come? I think there's not much choice but to dollar-cost average.0 -
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arrowloopboy wrote: »Yea ,he's sh1t isn't he
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lol well we can say he was sh1t last week, none of us lost $2.5 billion
:pac: 0 -
The investor's dilemma
I'm also apprehensive about this. I'm itching to pour some cash into the S&P 500. During the recent correction, I pumped some cash into the European index (as it fell the farthest), to the extent that I depleted my liquidity. Now the S&P 500 has pretty much regained all of its recent loses, so it seems I missed out on the 7% discount. Pretty bummed. But what if the correction doesn't come? I think there's not much choice but to dollar-cost average.
This is the market you want to pour cash into:
The market index, stock valuations in terms of P/E, and corporate profits as %GDP are at historic peaks.
I tend to take a long term view of these things (I don't pick individual stocks and don't bet on short term market movements), and therefore am reducing my exposure to the S&P500 and will start buying again around (what I think will be) very roughly the bottom of the next cycle.0 -
This is the market you want to pour cash into:
The market index, stock valuations in terms of P/E, and corporate profits as %GDP are at historic peaks.
I tend to take a long term view of these things (I don't pick individual stocks and don't bet on short term market movements), and therefore am reducing my exposure to the S&P500 and will start buying again around (what I think will be) very roughly the bottom of the next cycle.
I fully see your point - however, you don't know when the next downturn will happen. Timing a market is next to impossible. The S&P 500 might rise another 15% or 30% before it comes down. Or it may crash tomorrow. You could be waiting a long time. Or not.
Between 1988 and 1998, the S&P 500 rose an average of 19% per annum. Do I think that's happening right now? I haven't a clue. No one does. The best one can hope for is that if a significant correction happens, you have liquidity at the time to buy cheap stocks.
Time in the market is more effective than timing the market. That said, my general rule of thumb is to pour money into the index that's performing worst. For me right now, that's the European index, represented by VEUR.
I also have an allocation of short-term European government bonds, and a sliver of the S&P 500 in VUSD. Most likely I will continue to put cash into the European index and put many of my dollars into a US bond index ETF like BND (keeping it below 60k dollars so as to avoid US estate tax). I'll put a trickle into the S&P 500 every once and a while. And if the great correction comes, I'll sell the US bonds and buy the cheap S&P 500 stocks. That's the theory anyway. How it actually plays out might be different. I'm a long-term investor and frankly I don't care if my portfolio suffers a 40% loss in the short-term. It'll come right again.0 -
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Yes - itching to pour money into Starbucks, McDonalds, Fastenal, Berkshire, Coke, Pepsi et al because I think they're great companies - but not so keen as to put considerable amounts into them at current prices. But whenever the price comes down sufficiently, I'll move.Ok, that's a different ballgame compared to the "itching to pour cash into the S&P500" that I was originally responding to.To address some of your other points:
Interesting that we're both claiming to be long term investors, with very different approaches.
My approach is not unique - it's the one advocated by John Bogle of Vanguard, for example.Is timing the market really next to impossible? Yes if you are trying to spot the exact turning points, but I'm not trying to do that, not even close. My approach has a timescale of years - much easier that way!
I agree that timing is impossible but that responding to significant changes - if you're in a position to do so - is very possible and in fact optimal. I invest in stocks every eight weeks and am ultimately seeking to arrive at a balance between European equity and American equity. I'm generally oblivious to price movements between the times when I invest. But when the time comes every 8 weeks, I look at which index has risen the most since my last purchase - and I buy the one that rose the least.
If both my ETFs are surging, I buy bonds. The bonds don't grow or decline very much - they're boring as hell - but by maintaining a percentage of bonds roughly equivalent to my age -5, I will ensure that my entire investment does not fall into the bottom of a stock market canyon.
Unfortunately I have not yet experienced a stock market crash. Being a bit greedy, I'm really hoping for one to happen soon so that I can take advantage of it. For as long as the stocks are down, every eight weeks all my fresh cash would go into the cheap stocks. I would probably also sell some of my bonds and use the proceeds to buy additional stock if it was trading for a mouthwatering discount. If the market was really low, I'd also take some of my significant cash reserve and invest it in stocks too. I rebalance once per year to try to ensure my percentages (27% bonds, 36.5% Europe, 36.5% USA - though because the US has been very high since I started investing, it's currently only at around 7% of my invested portfolio and 3.5% of my total portfolio of stocks, bonds, and cash).Daily or weekly movements are irrelevant to me. Unlike you, losing 40% of my portfolio value would be a big issue and would mean I got out far too late (or got in far too late) and I balls'd up my strategy. I would consider your approach to responding to relatively short term market movements (eg the recent S&P500 correction) as trying to time the market in a much harder fashion. I'm pretty sure I'm incapable of making money trading like that, and would fritter away my investment.
I should have been more specific in my original post. I would be shocked to lose 40% of my total portfolio, given my penchant for bonds and cash. Ultimately, I don't have faith in myself to know when to sell at peak, because I cannot identify a peak. Thus I do not know "when to get out" - though luckily, I do know "when to get in".
Also, for most people (I suspect) selling at peak means you're liable to give the taxman a big cut of your profits. For me that's not an issue and maybe it's not for you too. But surrendering 20-30% of one's profits in tax is going to seriously undermine if not destroy the compounding process over an investment lifetime of, say, 30 years, not to mention also meaning that one is no longer earning and reinvesting dividends from the sold stocks.In my own case, my major moves in the last 15 years have been tied to long term market turning points:
IN to Irish property 2001
OUT of Irish property 2007 (to an extent anyway)
IN to S&P500 & other indices 2009
IN to Irish property 2012
I commend your success! I'll disregard the property side of things if you don't mind, because I'm more interested in talking about stocks (regardless, clearly your timing on the property side was very good). I'd like to think I would have also spotted the opportunity in 2009 and pumped money into the stock market. Certainly if a similar crash were to happen tomorrow, I'd be a happy man. But my question to you is, would you have known to get out of stocks at a high prior to the 2008 crash? That's the crux of the issue. Grabbing an opportunity like 2009 is relatively easy as long as you have cash. But knowing that the train is about to derail before it happens is the hard part. One can point to P/E ratios, etc. - but they're not reliable enough indicators that a major correction is imminent. Indeed before most major crashes, P/E indicators in the low 40s have been the norm. Tech stocks are certainly at levels far above that (only a fool would buy Amazon stocks right now imo) - but stalwarts like Coke and Berkshire aren't there yet. (I'm not saying, by the way, that I think there's still a lot of gas left in the S&P 500's tank. As I said previously, I have no idea what will happen or when it will happen).After 5 years of riding the S&P500 wave, given the returns and current valuations, I will not be adding to the investment but will be looking to see when the right opportunities are to exit and wait until the index returns to fair value. I certainly will not be selling all (or even most) of my S&P holdings immediately.
I think your decision to not add to the S&P 500 investment is totally sensible and I'm envious that I was late to the party.
But here's what I really want to know: You say you will be looking to see the right opportunities to exit. What exactly will you be looking for? In 1987 the market fell 20+% in a single day. These things can and do happen with alarming suddenness. Opportunities to maximally exit a peak market are not at all obvious - if they were, everyone would know when to get in and out
And by extension, the ability to identify when a market is at peak is also elusive - which is why new investors may not want to avoid the S&P 500 entirely. It might chug along nicely for another couple of years to the extent that it would actually pay to start buying it today. These are not easy choices:(
The market is currently at an all-time high, no dispute - but markets are supposed to hit all time highs every few years. It's to be expected.
So I think it comes down to where you are in your investment career. If I'd been a beneficiary of the current bull run, per the Bogle philosophy, I'd be loading up on bonds for the past while and would not be putting fresh money into the S&P 500. But for new investors, it's not quite as clear-cut I think - though a conservative approach sees me, personally, putting much less into the US index now than the European, while also maintaining a steady allocation of bonds and cash so that I can grab any opportunities that come along.
Yes, the past 20 years were not as good as other periods.Final point: looking at the real (ie inflation adjusted) returns on the S&P500 for the last 10-15 or so years, I would say timing that market is essential for decent returns.
Out of curiosity, and on a slightly different note, do you receive dividends and reinvest them?0 -
I agree that timing is impossible but that responding to significant changes - if you're in a position to do so - is very possible and in fact optimal. I invest in stocks every eight weeks and am ultimately seeking to arrive at a balance between European equity and American equity. I'm generally oblivious to price movements between the times when I invest. But when the time comes every 8 weeks, I look at which index has risen the most since my last purchase - and I buy the one that rose the least.
So what we're seeing here is two very different investment strategies. I get your logic, but I'd still like to challenge you to see if it works in the long term in the modern world.
My fundamental point is that the optimum investment strategy must take into account the long term dynamics of the market and that these dynamics have changed. Furthermore, several investment strategies which were successful at one stage are not a priori successful in this 'new normal', even at reasonably long timeframes.
Consider the S&P500 1980-1995 trend. Clearly, a 'continuous accumulation' methodology such as yours will work pretty well. In fact, any mistakes you make are quickly hidden by the overall trend. (We all thought we were fantastic traders in the last few years of the 1990s!)
But that's no longer the world we live in. Now, the dominant pattern in many markets is the cyclic peak to trough, which may be 10x the long term trend.
So, over the space of a couple of years (especially when valuations are going generally up), an accumulation-based strategy such as yours with an 8 week time horizon can seem to be very successful, but really you're not seeing the wood for the trees. Over the 10-15 year time horizon I submit you may well make no money whatsoever due to how modern markets are behaving - pick the points on the trends above where you would be buying (as you make no mention of selling).
So for me the key thing is to buy when things are historically cheap or well below trend, and hold/sell when they are historically very dear or well above trend. So, no major insight there! But I would invest in a substantial fashion when I identify that something is cheap and then may not trade again for a very long time. This is NOT how I would trade if I thought we were in 1980-1990s S&P500 territory.
Deciding when to sell is the hard bit as you point out, that's for sure! But the falls are rarely that sudden and it's not a case of sell all or nothing (except maybe for property, and lack of liquidity is your biggest enemy).So I think it comes down to where you are in your investment career. If I'd been a beneficiary of the current bull run, per the Bogle philosophy, I'd be loading up on bonds for the past while and would not be putting fresh money into the S&P 500. But for new investors, it's not quite as clear-cut I think - though a conservative approach sees me, personally, putting much less into the US index now than the European, while also maintaining a steady allocation of bonds and cash so that I can grab any opportunities that come along.
For new investors, my advice is the same - don't buy if it's historically very dear or well above trend. There are other asset classes to invest in, or hell, wait a year or two.
Again, my fundamental point is that huge market swings over the space of years are the dominant pattern of many modern markets.Out of curiosity, and on a slightly different note, do you receive dividends and reinvest them?
In one way there's nothing special about dividends compared to the rest of your cash - if it's the time to buy, then buy. All things being equal tax-wise of course. I'm well aware that the very long term quoted market returns are predicated on reinvesting dividend income, but still that's based on their being a dominant long term positive trend.0 -
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