Do I Need to Market Time?
Maybe you just got your tax refund, reimbursed for a large work expense, or finally built up a good amount of cash that you wish to invest. With the Dow Jones at near record highs (16,294) at the time of this post, is now the right time? Should you wait for a correction first?
What I tend to do is look at the current stocks I own and see if any are “cheap.” I also search through my watchlist to see if there are any relative bargains. “Cheap” could be that the stock price is currently lower than I bought it or that it has a low-ish price-to-earnings ratio.
Despite the market as a whole being high, there usually are a few stocks that I own or would like to that are lower in price than when I initially bought them (or added them to the watchlist).
That seems to work for me because at this point in my life I am only able to invest 2-3 thousand at a time. Would I change my approach if I suddenly had a windfall of $30,000 to invest? Would I still put it all into the market at once?
In my case I’d likely divide it among five or six companies and get it into the market as soon as possible. But, is that the best option? A dollar-cost averaging strategy would be another option. In that plan, you’d invest $5000 a month for 6 months and make it less likely to buy at the market peak. You’d buy more when the prices are down and less when things are more expensive…see the previous link for more details.
Since I’m buying individual stocks and don’t yet have that big a portfolio, putting $30,000 into any one individual stock would make that single stock a huge portion of my portfolio. It would destroy any semblance of a good asset allocation. But, let’s say that I decide not to invest in individual stocks and will instead focus on ETFs which track the broad market. What then would be the best route? Wait until there’s a correction, invest it all at once, or spread it out over a few months?
With the idea of waiting for a correction, what would constitute a big enough correction to warrant entering the market? Wouldn’t you be worried that if there’s a really big drop, that it could continue to drop? I have somewhat of a personal example that shows that whenever you have the money available is the correct time to invest.
When Google had their IPO, I was in college and signed up to participate. I was expecting Google to open in the $30 range. Instead Google opened around $85, which I thought was too expensive for a company that just did advertising. Shortly thereafter the stock was $150 and I was kicking myself for not investing at $85; but it had to be too expensive now. Then, not too long later, Google was at $300 and again I was kicking myself for not investing at $150. You can all see where this is going. With Google being over $1000 now I should have invested early and often.
Since I look at investing in individual stocks, my job is a little easier. While the market as a whole may be up, I am still able to find bargains out there.
I recently read an article on Schwab entitled Does Market Timing Work? The gist of it is: investing immediately pays off. In fact, investing immediately was almost as good as buying at the lowest point in the market each month. For a video animation of this article please visit Schwab’s page here.
Another article on DailyFinance advises that It’s Never a Good Time to Invest in the Stock Market – Do It Anyway. This site makes a good point that if you always wait until the perfect time to invest, you’ll rarely find it. For example, in the ’90s there was the Asian financial crisis and the Persian Gulf War; in the 2000s, the September 11th attacks, subprime lending/housing meltdown, and the Great Recession; and the 2010s, Nuclear threats from North Korea, Greek bailout and eurozone crisis, and mortgage delinquencies peak above 14 percent.
Looking back there were tons of reasons NOT to invest in the stock market. Yet, as we now know, the market did well even with a few recessions peppered in.
Moral of the story is that money that you don’t need in the short term should be invested as soon as possible in the stock market. Now I’d just love to get that $30,000 windfall to put that theory to the test.