Should I wait for the market to go down before choosing to invest?
I have cash that has been sitting in a savings account earning nearly 0% interest, but the market is at an all-time high. Should I wait for the inevitable downturn to invest?
You’re describing market timing. We’ve all heard the common refrain of buying low and selling high. It’s easy, right? Sadly, like most conventional wisdom, that strategy overlooks important nuance. To win the timing game, investors need to guess both the right time to get in and the right time to get out. But here’s the catch, markets are fickle and ultimately unpredictable. Every data point on the planet may suggest a stock will soon fall, but an irrational market may decide otherwise. Worse, the entire market could move in the opposite direction of sentiment. Remember when people said the market would nosedive if the U.S. elected Trump?
To your point, historical averages suggest we are “due” for a recession. However, the market may very well continue upward. Meanwhile, inflation could continue to erode the purchasing power of the cash you leave in the bank. Ask yourself, how much does the market need to drop before you jump in? Is it 5 percent, 10 percent, 20 percent, more? It’s impossible to determine the exact bottom of the market.
At near-record market highs, someone that can’t emotionally withstand a sudden drop in portfolio value may consider a dollar cost averaging approach to entering the market. The downside to this approach is the opportunity cost of not putting all of your dollars to work. But strategy must depend on risk tolerance, liquidity needs, time horizon, etc. Regardless of how and when investors enter the market, we suggest people build diversified portfolios and maintain a long-term mindset. (For more, see: “Coaching Clients Through Financial Planning: How Advisors Add Value By Managing Behavior”)
The odds of the stock market being higher one year from now are the same whether we're currently at a record high or not The market pull back you are waiting for will happen at some point but it might fall back to a point that is higher than we are today. As long as you don't have an immediate need for the money you're investing, then you will likely experience growth if you invest in a diversified portfolio.
Attempting to "time " the market is not a winning strategy . If you are planning to be in the market for many years , you can Dollar Coast the invetsments. Spread the purchases over months when the market is down your investment dollar will buy more shares. When the market is up you will buy less shares. The key is to have an investment plan to match your goals .
That's a very common question. And one I hear every single year, especially since 2012. The problem is that since bull markets go longer and farther than most people imagine, there's no telling if you wait and end up buying at much higher levels than today. While there are many DNA markers which are almost always present before a bear market begins, they are not present today.
You can certainly dollar cost average your way into stocks but investing a certain amount of money each and every time interval, weekly, monthly or quarterly. At higher prices, you will buy less shares while at lower levels you will buy more shares.
You can also find investments which have lower volatility than the overall stock market. Additionally, you can invest in "balanced" ETFs or mutual funds which have both stocks and bonds.
The first question to ask is what is the goal for this money? If it is part of your cash cushion (typically 3-6 months of your committed expenses should be in savings) then no, leave it in the savings account. You can look into a high yield savings account though which can offer more like 1%. Check out high yield savings accounts at www.bankrate.com. If you already have your cash cushion goal met and this is surplus money, then meet with a financial planner and determine which investment account is best for you based on your financial plan and figure out the best investment game plan to get this invested. Timing the market is nearly impossible and while there may be a downturn soon, if this money is earmarked for a long-term goal such as retirement with a 10 year plus strategy, then it invest it for the long term and focus on asset allocation and diversification for this money. Hope that helps!