Should I buy into an index fund while the market is at record highs, wait until it dips again, or does it even matter?
I put 15 percent of my salary into my 401(k), which reaches the $18,000 max, and also have a Roth IRA that has the max of $5,500 in it. After months of research, I’ve decided to invest in an index fund, but I can’t determine when is the best time to invest. Should I buy into the fund now while the market is at record highs, wait until it dips again, or does it even matter?
Timing matters....a lot. However, taking advantage of that little tidbit of information is not so easy. Fortunately for you, when you put money into an investment on a regular basis, you are taking advantage of dollar-cost-averaging. For more information go to this link:
Simply, as the market drops you are actually accumulating more shares with a fixed dollar investment. When investing in funds, it is about share accumulation. Price will take care of itself over the long run
This is an interesting question that has been getting asked more and more frequently as the markets keep rising. Since I don't know your personal situation and I can't give any sort of investment advice without knowing all variables, let me give you an argument for both sides instead, hopefully this could help you make up your mind.
Since we can't time the market or make a good prediction to the near future, let me say that statistically speaking markets go up 2/3 of the time, and go down 1/3 of the time, which essentially means dollar cost averaging works in your favor 1/3 of the time where you find yourself adding more shares for a certain dollar value (assuming a disciplined approach is taken when the market isn't doing good.), but in 2/3 of the time you're actually dollar cost averaging on the way up therefore buying fewer shares for the same dollar amount.
Now, the risk of buying all at once is especially significant in the event you are near or in retirement, this way you simply won't have the time necessary to accumulate more to buy at these lower prices.
Tip: Whether you decide to buy now or wait, staying diversified is the most important thing that you could do even if you are passively invested. Look into different asset classes and different regions that have a lower correlation to the SP500. This way, in the event of turndown you'll be able to rebalance and take out gains from the better performing asset classes, and re-allocating capital to the worse performing asset classes.
First of all it depends how old you are and the type of asset risk you are willing to take. Let's assume you have 10 years or more until retirtement and have moderate risk (60% equity and 40% bonds). Trying to time your way into a market has the highest probability for loss. I had many clients over the last 5 years tell me the same thing and never imagined the market would keep going up. They have sat on cash for 5 years and have lost large amounts of asset appreciation.
Just set an allocation and keep buying. You will go through many cycles over the next 10,20 or 30 years. THe only sure thing is markets will go up and markets will go down. Be proactive and buy now. Remember keep your money working and keep adding when the market does correct.
That is an age-old question. As a Financial Advisor and Planner, I advise people not to try to time the market, which is what your question implies. So, the simple answer is: if you’re going to invest in the market and have the resources, do it.
But you have left out a lot of information. You question also implies that you are going to invest in the stock market via an index fund. A good Advisor would ask a lot of other questions before providing an answer.
Questions such as:
- Do you have an emergency fund?
- How old are you?
- When would you like to retire?
- How much income will you need in retirement?
- What are your income sources now and in retirement?
- What is your current asset allocation?
- What is your risk tolerance?
- If your stock portfolio went down 20, 30 or 40% what would you do?
- What index fund are you planning to buy? Why?
As you can see, there are a lot of questions to be answered before plunging into the stock market via an “index” fund. A good financial planner would be a great investment for you right now.
For starters slight correction as the maximum you can contribute is $18,500 to a 401(k) this year so may be a way to increase your pre-tax deferral. I'm assuming your money is currently invested in some sort of equity holdings maybe just not an index fund. That said assuming it isn't sitting in cash and this is what you'd like to do I see no reason why to wait. I'd presume these funds will go down if you wait for a "correction" any way so you aren't really selling high and buying low. If these funds are indeed sitting in cash and not subject to market volatility quite honestly my recommendation doesn't change, however could make an argument to dollar cost in over a few months. Long story short timing almost never works and if these are long term investment dollars you are better served getting them working for you as soon as possible.