Love the show. I’m wondering if there is ever a bad time to put money into index funds.
My thought process is that the market is at (or close to) an all-time high right now, so it seems silly to put my money into an index fund when the market is due for a downturn. My current plan is to wait for the dip and then move a majority of my cash savings in (excluding the rainy day fund).
Background info on my current financial situation:
- Debt Free
- $18k Cash savings
- $20k in Company stock (via ESPP 15% off market price at the start or end of 6 month period). I know this is a relatively aggressive strategy, but the stock has been fantastic, returning over 150% of the average initial investment in a 2.5 period.
- $17k in 401k
- $60k in mutual funds from grandparents. I have not touched this account since it was opened. I plan on using this to purchase my first home.
Jeff, thanks for the great question and we appreciate the compliments on the show. The root of what you’re getting at is what most would refer to as ‘market timing.’ Unfortunately, that phrase, in my opinion, often gets a bad wrap and tends to insinuate someone who is jumping in and out of the market, looking for short-term gains, and attempting to only catch the up moves. I realize that isn’t what you’re suggesting; so, I’ll let you research the countless pitfalls of a real ‘market timer.’ The reality is that, whether or not you have any financial market experience, you’re recognizing that the market, now standing a stone’s throw from 30,000 has been rising steadily for over a decade. Who, in their right mind, would buy now? I get it, and I’m not going to fall back on some guttural response that says, “Blah, forget about that, go all in.” The moment that happens, Murphy’s law will set in and you’ll watch 20% of your assets vanish into thin air and you’ll forever hate the stock market and probably no longer be a fan of our show.
The flip side of this, however, is that I have been hearing from folks who’ve been scared to invest for the last 20,000 Dow points, and that is NO exaggeration. After the great financial crisis, Dow 10,000 was a natural place where folks decided enough was enough and a good spot to take money out and wait to see what happened. I’m sure they felt good about that sale, but, looking back, I’m sure they cringe at what, in reality, was a horrible decision. Furthermore, the psychology for them has been absolutely brutal, as every single thousand points move higher just became another level where they said, “Well, I can’t go back in now, this is just silly.” Nonetheless, here we sit 20,000 Dow points above where so many folks bailed out, and my guess is they’ll never re-enter.
Before we lay out a strategy, it’s important to understand a few key things that always help me to buy, regardless of where the market stands at any given moment. First and foremost, one thing you have to realize is that, over time, a bulk of your gains will come from dividends and reinvesting. In fact, I’ve read that over the last several decades a majority of the market gains have actually come from dividends and NOT price appreciation. Hold a second while I Google an article, https://www.thebalance.com/the-importance-of-dividends-416840
So, the bottom line regarding this is that the longer you hold, the more dividends you collect and, therefore, you set yourself up to compound your money nicely over time.
The second critical factor I can share with you is your time horizon. If you have at least a 20-year time horizon, I am a firm believer that, regardless of when and where you buy, an index fund will be higher in the future. How can I make such a claim? Well, let’s examine for a second how these things are actually made up. You see, what most people don’t know is that, over time, an index changes with stocks being dropped and others added. When you really grasp this, you’ll understand the power of index funds. Take the Dow Jones Industrial Average for example. Starting in the late 1890s, the index has grown to sit at just under 30,000. How is this possible if not a single company in the original Dow index is in that index today? Well, it’s really simple. Once they started stinking up the joint, they were dropped and something else that was growing was added. Make no mistake, In the future if space exploration is the greatest business ever, the Dow will be filled with those stocks.
With an understanding of these two key facts, my suggestion would be to simply break up your buying over the next year or even 18 months. Rather than buy in here with your whole stack, just spread it out and dollar cost average as you would with a retirement account and contributions from your paycheck. Don’t get too cute and don’t try and time the exact entry. Just lay out your plan and proceed with the caveat that, if we were to see a dramatic pullback, you could always commit more and buy in more aggressively.
Work hard not to worry about the price of the market, maintain a long time horizon, and use those dividends to your advantage!