The Dow hit its record...scared to invest

[$ hoarder]

I'm 29 and just now have some cash to sock away in non retirement investments but it seems like a terrible time to start investing since the market is the highest it's ever been. Our advisor says to be patient (we have a lot of our retirement in cash waiting to be invested since we just changed advisors) but I'm getting anxious. We would like to put about 25k into non retirement investments or else we will end up doing home improvement we don't really need. Am I thinking too short term? Should I assume by the time I retire the Dow will be much higher? Any advice would be great.

[Wino]

There has never been a 30 year period where the Dow has declined. I think you'll find that any 30 year period probably averages at least 8% per annum, no matter what period you choose. The Dow right now is fueled by the quantitative easing being done by the Fed. The corporate numbers don't support the growth by themselves.

So, your choice becomes: Take a chance on a long-term proven investment that might crash and wipe out a large part of your savings or leave your money in a safe low-interest account that will definitely lose some of its value to inflation.

Past performance is no guarantee of future results, but also all reward is proportionate to the risk involved. What this means is that in order to get big returns, you have to take bigger chances than you can get with "safe" investments.

I suggest you put your money where you are comfortable putting it, and start to read and ask specific questions about where to move it when you're comfortable moving it. No one can predict the future, so there is nowhere "safe" for your money. The market could lose 20% tomorrow. The market could gain 15% tomorrow. The market could be flat tomorrow. I'll let you know what it did in a couple of more days. Then I can tell you what you should have done with your money.

Personally, I have my investment money is several types of stock-based funds - growth, income, and dividend; international and domestic; small and large cap - and I've never lost much at any time, but the value is much higher than I've put in. I'm willing to take my chances that it will all be wiped out tomorrow. I don't do bonds, though. I really don't understand bonds or bond funds, so I don't put my money there. Maybe one day I'll read up on bond funds and decide to invest, but for now, I understand how the stock market works, so I'm comfortable there.

I suggest you look up Vanguard online and start reading some of their articles on investing.

[disneysteve]

I'm 29 and just now have some cash to sock away in non retirement investments but it seems like a terrible time to start investing since the market is the highest it's ever been.

I'm of the firm opinion that there is no such thing as a "terrible time to start investing". You are 29. If you start investing and don't touch the money for 35 years, the level of the DJIA today will not even be a distant memory.

Let's look back 30 years to 1982. The DJIA was at 776 in August (that's the date I found on a quick search). Today, 30 years later, it stands at 14,253. That's an increase of over 18 times. Obviously no guarantees but if it followed that same path, when you are 59, it could be at 262,000.

[KTP]

And bank CDs were paying 12% in the 1980s

This ain't the 1980s


12% a year for 30 years would be over 29 times your money!

[MonkeyMama]

In addition to the above, the natural inclination is to buy high and sell low. You might be surprised how much of a run there might be with stocks so high right now. (We've even had a few comments in these forums from those who sat out the market for many years and who think that *now* is the time to get back into the market. When things are hot, that's when people do tend to buy in).

Regardless, if you want to hedge your bets a bet (because frankly no one knows and can go either way in the short term) you can start slowly putting money in the market. It does not have to be all at once. I don't think it will probably matter for the long run. If it were me, and it was for retirement, I'd just put it all in now.

[disneysteve]

In addition to the above, the natural inclination is to buy high and sell low. You might be surprised how much of a run there might be with stocks so high right now. (We've even had a few comments in these forums from those who sat out the market for many years and who think that *now* is the time to get back into the market. When things are hot, that's when people do tend to buy in).

This is exactly what has been happening this year. The inflow to stocks and stock funds has been huge despite the fact that the market is hitting record highs. The "best" time to invest was 2-3 years ago when the market was bottoming out but what really happened is that's when people pulled out hundreds of millions from the market and parked it in cash. Only now that a huge recovery has already happened are people starting to put money back into stocks.

The stock market is the only "market" where customers prefer to buy the merchandise at full price and refuse to take advantage of sales and discounts.

[feh]

Don't try to time the market. Now is a fine time to invest, assuming your time horizon is far away.

I really don't understand the "OMG, the market is at an all time high, therefor it's a bad time to invest" point of view. Bonds are probably in for a rough ride the next few years. CDs/savings will likely lose value due to inflation. Equities are the most attractive option right now.

[~bs]

Caution is prudent, and understandable given the recent recession. Understand that the dow is at a nominal high. Not necessarily a inflation adjusted high.

[Chart_oasis_man]

Do not forget that current Dow Jones index is not the same as 6 years ago.
A lot of bankrupt companies have been removed from the index since the financial crysis broke out.

[creditcardfree]

I agree with others comments. But since you said non-retirement investments, I wonder what your goal is for the money. Are you going to need it in three to five years? If so, the stock market may not be the best place for the money. It's a fine time to invest in the stock market if your timeline is ten years or more.

[kv968]

Do not forget that current Dow Jones index is not the same as 6 years ago.
A lot of bankrupt companies have been removed from the index since the financial crysis broke out.

True it's not the exact same index it was 6 years ago but only one of the companies removed was bankrupt (GM).

Granted it could be argued that AIG and Citigroup WOULD have been bankrupt had it not been for intervention but they're still kicking.

[thekid]

Largerly irrelevant if you are a long term buy and holder and broadly diversified.

Long term, your return will be roughly the earnings of your underlying stocks. Changes in valuation (that dominate short term returns) become progressively less impactful with time (ie. they get drawfted by earnings). Long term returns will be current yield + yield growth +/- valuation changes. At current prices, you should expect lower than historical returns. 3% real, 6% nominal is realistic for broad based indices goingforward (current yield is at a low-by-historical standards 2%, earnings growth is mean reverting over long periods at around 4-5%, current valuations are a bit expensive and may lower causing somewhat lower returns).

Fyi, don't look at the current level of the dow for pricing information. You have to look at a combination of indicators, such as p/e, p/b, yield and compare current level to historicals. A common (albeit imperfect) measure is using pe10 (trailing 10 year earnings, adjusted for inflation). Historical mean pe10 is about 17 for the S&P500. Right now, it's at roughly 22.5. It was at all times high in 2000 (that was when the market was the most expensive all time) at an astounding 42. We've never really come back to means from the "irrational exuberance" of the late 90s. Save for two very brief periods, the S&P has been trading at pe levels above mean since roughly 1989.

However, knowing that the market is likely some 25% "overvalued" by historical means and being able to profit from that is two quite different things. As I stated, last time we were at valuations at historical means was over 20 years ago. Maybe there is another correction coming. Maybe we just stagnate and earnings catch up. Maybe we go on another huge bull market and stay "expensive" for a long time yet. Nobody knows. Staying out of the market at valuations above means would have meant missing the incredible 1990s bull market. There is little alpha from effective market timing, if such a thing is even possible. Some studies show perhalps a 0.50% per annum alpha from perfect (only possiblevto know in hindsight) valuation based timing.

I would advice you dollar cost average your way into the market (better yet, value average in -look it up if you are interested). Know that even a huge permanent 50% drop in pe would amount to roughly 2% lower yearly returns over some 30 years, a lower return that would be mostly offset by the higher yield on lower price (ie. You have low duration risk over long term -even less if, as a young investor, you further compress your duration with additional purchases at the lower price).

This may sound a bit complicated, but really valuation changes have limited impact over long time periods (they are drawfed by earnings). Your main take away, if you decide to buy now, is that you should expect lower-than-historical returns on your stocks. Returns that nonetheless still seem very much favorable to other asset classes, such as bonds.

[sherylgray]

Investment Plan

I'm 29 and just now have some cash to sock away in non retirement investments but it seems like a terrible time to start investing since the market is the highest it's ever been. Our advisor says to be patient (we have a lot of our retirement in cash waiting to be invested since we just changed advisors) but I'm getting anxious. We would like to put about 25k into non retirement investments or else we will end up doing home improvement we don't really need. Am I thinking too short term? Should I assume by the time I retire the Dow will be much higher? Any advice would be great.

I think, you should follow the advice of your financial advisor. It is preferred to invest while the market is stable. So, put your amount in non-retirement investment plan as you are thinking of and be patient to get the returns.

[disneysteve]

it seems like a terrible time to start investing since the market is the highest it's ever been.

I thought it would be fun to revisit this thread.

When this was posted in March, the Dow was at 14,253.

The Dow closed on Friday, 5/17, at 15,354.

That's an increase of 7.7% in just over 2 months!

So all of the folks who were afraid to invest earlier this year because the market was "the highest it's ever been" have missed out on a huge rally. 7.7% from 3/5 to 5/17 is an annualized rate of return of 38.5%.

The moral of the story never changes. Stop trying to time the market. Stop trying to guess when the market has peaked or when it has bottomed out. Just keep investing consistently over time.

[Petunia 100]

I think, you should follow the advice of your financial advisor. It is preferred to invest while the market is stable. So, put your amount in non-retirement investment plan as you are thinking of and be patient to get the returns.

Actually, investing only when the market is "stable" is a great way to lose out on most of the market's returns.