A Common Question

In my last post, I gave advice on bitcoin. This week, I’m going to answer the other common question I’m asked lately: “Is the market too high? Should I sell everything and go to cash? Should I wait to invest until the market goes down again?”

No One Knows When

Let me be clear about something. No one knows when the markets will go up or down and by how much. No one. If they try to tell you otherwise, they’re pulling one over on you. If they predicted something correctly in the past, that is no indication of how their predictions will do in the future. Maybe you could correctly guess heads or tails in a coin flip one or two or three times in a row, but at some point you’ll be wrong. The same applies in the markets.

Principles of Investing

And because no one can predict with precision and accuracy how the market will move, it is best to stick to the principles of investing that work year-after-year, including:

With these core principles in mind, guessing what the market will do becomes irrelevant. Instead, you know what your strategy, goals, risk tolerance, and time horizon are and invest accordingly. The market movements just become noise.

That’s not to say that markets won’t go up and down. They will! In fact, sometimes they will go down a lot. But guessing isn’t a strategy. It’s gambling, betting, speculating.

While watching the market drop may still feel unsettling, even when you have invested appropriately for your situation and understand the basic principles, it would likely feel a lot worse to watch one big company go down after you’ve bet the farm on it.

Food For Thought

If you’re very worried about your current investments and feel a desire to sell everything and go to cash because you think the markets are too high, it’s probably a good indicator that you are invested too aggressively for your own taste. Additionally, if you think you’ll go to cash now and get back into the markets once they go down – and before they go back up again – ask yourself if you really think you can time it perfectly to implement this strategy successfully. And, do you really want to track the markets from day-to-day so you can guess when to sell out and buy back in? Often people wait until markets are up again and things feel stable, but if you buy then you’ve already missed all of that growth.

US markets have gone up for several years now. To those that asked me this question a year ago, if they had gone to cash they would have missed one of the best years across US stocks, international developed stocks, international emerging markets, real estate investments, and bonds! If you thought the markets were too high a year ago and made a big change, you lost out on a lot of growth in 2017.

A Better Approach

A better approach is the rebalance in a disciplined manner. If you use a target date fund, this is pretty much done for you within the fund and you don’t have to worry about it. If you don’t use target date funds, rebalancing might look like this:

  • Let’s say you target holding 80% in stocks and 20% in bonds.
  • When things do well, your stock holdings may grow to 85%.
  • At this point, you sell what’s done well (stocks) to get back to 80% and buy what’s done poorly.
  • This is a disciplined way to avoid speculation and ensures you sell high and buy low.

Selling low and buying high is a terrible strategy.

Think Of Your Money In Two Buckets

It may help to think about your money in two buckets:

  1. Money that has already been invested, which should be for long-term goals
    • This money should have the time horizon to withstand market ups and downs and remain invested, even when the markets are volatile.
    • If you can’t afford for that money to go through the market cycles of highs and lows, it shouldn’t be invested.
  2. Money that has not been invested
    • Money that is not invested (cash) should be used for short-term goals (for goals coming up in 0-3 years, maybe even 5 years).
    • If you’re sitting on cash right now that could be used for long-term goals but you think you would have a negative emotional reaction if the markets crashed right after you invested, then I would not invest this money in stocks (just understand what you might be giving up in terms of long-term growth).
    • BUT PLEASE, don’t go to cash with money that is already invested. You won’t know when to buy back in. Once markets are up and you feel comfortable investing, it will be too late. You’ll have missed out on a lot of growth already and will be buying high.

Dollar-Cost Averaging

If you invest on a monthly basis into a 401(k), TSP, or 403(b) plan, keep doing it. This is long-term retirement money. You want to make sure you get your employer match, if applicable. Investing monthly, or on another regular basis, is a strategy called dollar-cost averaging. Instead of dumping a large sum of cash into the market all at once, you invest smaller amounts on a consistent basis. This means you are putting money to work on several different days throughout the year. On some of those days the markets may be higher than others, but with this disciplined approach you put money to work without making bets on which day to buy (and let things average out, so to speak).

The General Trend Is Up

For most readers, who are in their 20s and 30s, you won’t remember how high the Dow was in 2018, but when you take your money out (decades from now) to cover your living expenses in retirement you should feel confidant it will higher.

Here’s one way to check. Look up what the Dow was at the beginning of your birth year. Or, just use my own personal example: On January 1, 1987 the Dow closed at 2,158. On January 12, 2018 it closed at 25,803. Over the long-term, markets go up (see the picture at the top of this post). But it’s a long-term game. Don’t buy and sell based on short-term noise.

Final Notes

Let me know if you have any questions! And know that specific investment advice should come from a professional who knows your specific situation.

PS – This post on how exactly to invest should help with the mechanics of investing, if you need that guidance as well.

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