Investing in the Bull Market

Septus

I've got $4000 sitting in my Roth IRA uninvested that I recently transferred in to hit my annual cap. I've also got $4000 from last year that was invested in a Vanguard S&P 5000 index fund that of course, lost something like 40% of its value.

Should I be investing my new money now, or wait a few months? I'm thinking that the ideal time is coming soon, and I don't want to miss it, but I also don't know what to buy.

I'm thinking it's a good idea to have some diversification, so a foreign fund might be a good idea, although with the minimum investment limits in those funds that I see, I'd end up having to put at least $3000 in any new fund(I'm basically considering using Vanguard again).

So my current plan is, invest 25%, or $1000, into my current S&P index fund now. Then I wait a month or so, maybe 6 weeks, and buy $3000 in a World Index Fund, or a World sans US fund. Anyone care to recommend something different, or some other general advice?

Dman

First off, major analysts are not predicting a quick recovery. Don't expect the stock market to make any significant gains for at least 2 years. If you plan to leave that money in there for 10+ years, then now might be an OK time to invest.

I think diversity is definitely key, looks like your good on that front.

If you invest your cash in some sort of retirement plan then you don't have to pay tax on it now....you pay tax on it when you take it out of the stock market.

So if you take it out during a year in which you have very low income (like after retirement, or if you loose your job) you won't really pay tax on it at all.

I don't know what your income is but I would definitely consider putting that money in a retirement plan, it effectively lowers your taxable income so when you file your tax return you should get a nice tax rebate. It might be too late to put it on your 2008 though...so u might not see that tax rebate till you file your 2009 taxes.

FafnerMorell

There's a forum at "www.diehards.org" with a lot of good general investing discussions heavily biased towards Vanguard and low-cost index funds.

One thing I'd point out - unless you're incredibly lucky, you probably won't buy precisely at bottom. So, resign yourself that, yes, had you waited (or gotten in sooner), you would have made yet a little more money. However, don't let that discourage you - no one really knows the ideal time.

Personally, I'm investing in both US & global equities - if you've got a long-term horizon (say, 15+ years), I think things will definitely be going upwards compared to where they are now. I put mine in Vanguard's VTSMX (US S&P 5000 (well, Russell 5000 or whatever)) and VGTSX (Global). VFWIX (I forget if that's the EFT or fund) is also good - but slightly higher expenses than VGTSX - and it wasn't around when I first stated going global, so I've been sticking w/ VGTSX just because I don't feel like moving.

Another thing to consider is TIPS (such as VIPSX), which are relatively stable, currently "cheap", and will do well if inflation increases over the next few years (which is a hot topic of debate).

saggio

Most stocks were grossly overvalued before the crash. If you are willing to wait it out, there are tonnes of buying opportunities right now. You just may have to wait ~4 years to see any significant profits.

There will be a recovery, eventually. If you can stick it out, you can make off like a bandit.

Treeloot

If you're just buying index funds go ahead and buy now.

Thanatos

Yeah, no one is going to be able to tell you when the best time to invest is until after it's already happened. If you're planning to leave it in there for a long time, now is probably not a terrible time to invest, since we're probably through the worst of it.

grungebox

Generally something like 60% domestic stocks is optimal. Something like 60% VFINX (S&P500) and 40% VFWIX (FTSE all-except-US). Don't buy both S&P 500 and the Total World Index since that's redundant regarding US holdings, and I think there's a fee for the Total World Index fund since it's quite new. There's also VGTSX but that doesn't include Canadian holdings. In either case, it's an IRA and it's an index fund. Don't bother timing, just invest and forget. Timing is for people who like to lose money, since it's impossible to guess the bottom of t he market.

100% of the info in that paragraph was from Diehards.org, by the way. Excellent forum.

Djeet

Assuming you've laid out all your IRA holdings, sounds like you're 40/60 S&P500/MM Prime (money market), the benefits of this are that you're not really going to lose anything on that 60%. Where do you want to be?

If you're going to have an investment strategy of long-term holding of broad-based indices with primary weightings between U.S. and World (my guess from your post), instead of trying to bottom-guess you might try to think about how you want it allocated (e.g. 50%/50% U.S./World, 40%/30%/30% U.S./World/MM Prime, 30%/30%/40% U.S./World/C.D., etc) and then re-visiting once/twice a year to rebalance the weightings to changes in valuation or changes in how you want to weight things.

What that means is that once you've decided what your weightings are (or whatever your holdings are going to be based upon your investment strategy) some time you're going to have to make those weightings and take whatever price prevails.

Market timing is only for the tremendously lucky or the those with insider information. For example, do you think there's something significant that's going to effect world market valuations over the next 4-6 weeks? If not you could allocate funds to that World fund now ... or maybe you're still unsure and want to wait 6 months?

Yeah you should probably have some World exposure, though personally I'm weighted more towards the West then Russia/The East/emerging markets as I think the West will probably lead the global markets higher.

Your U.S./World dichotomy does force certain ways of looking at things, though I understand that due to fund minimums you're forced into picking from just a few funds.


Edit: One thing about holding foreign funds in US-tax-advantaged accounts if that you cannot file for a tax credit for the foreign tax withheld. So to be most tax-efficient you'd want to hold those foreign funds in US-taxable accounts if you can.

RUNN1NGMAN

I'm assuming that you aren't 60 and that therefore the money in your Roth IRA is not going anywhere for at least 20 years, and if you're like most people on this board, closer to 40 years. In that case, feel free to invest now. And don't sweat the fact that your shares in the index fund lost value...realistically, you shouldn't care where the S&P is now, you should care where it will be in 20-40 years. You're fine.

Zeon

If i had to give any advice id say maybe wait a few more weeks (Like, a few weeks into march) until more companies drop their annual reports. 2008 wasnt a great year for anyone, and the annual reports are still going to look pretty sour overall. Sure theres a few winners out there but if youre dumping into a fund, chances are its value is going to drop again once those reports hit since losers are still outweighing the winners.

Then again you seem like youre going to be buying euro or asian based funds so this advice might not really apply, since i dont think most european reports come out until may or june, and asia i dont have any idea when their average fiscal year end is.

theclam

Zeon wrote: »

If i had to give any advice id say maybe wait a few more weeks (Like, a few weeks into march) until more companies drop their annual reports. 2008 wasnt a great year for anyone, and the annual reports are still going to look pretty sour overall. Sure theres a few winners out there but if youre dumping into a fund, chances are its value is going to drop again once those reports hit since losers are still outweighing the winners.

Then again you seem like youre going to be buying euro or asian based funds so this advice might not really apply, since i dont think most european reports come out until may or june, and asia i dont have any idea when their average fiscal year end is.

People are already expecting those annual reports to be bad and the price of stocks already takes that into account. They could be more or less bad than is expected and that will affect stocks, but there's not really any way of knowing which it will be.

Dog

Many funds have already accounted for the forthcoming reports and have adjusted accordingly. You're not going to see huge drops unless there is some kind of unexpected bombshell dropped by a major company.

Treeloot

Zeon wrote: »

If i had to give any advice id say maybe wait a few more weeks (Like, a few weeks into march) until more companies drop their annual reports. 2008 wasnt a great year for anyone, and the annual reports are still going to look pretty sour overall. Sure theres a few winners out there but if youre dumping into a fund, chances are its value is going to drop again once those reports hit since losers are still outweighing the winners.

Then again you seem like youre going to be buying euro or asian based funds so this advice might not really apply, since i dont think most european reports come out until may or june, and asia i dont have any idea when their average fiscal year end is.

You're usually better off not timing the market, especially if you're investing for the long term. While the stock market might drop after the earnings reports, there's about an equal chance we'll see gains as well.

Septus

FafnerMorell wrote: »

One thing I'd point out - unless you're incredibly lucky, you probably won't buy precisely at bottom. So, resign yourself that, yes, had you waited (or gotten in sooner), you would have made yet a little more money. However, don't let that discourage you - no one really knows the ideal time.

Yeah, I'm not worried about hitting the very bottom, I just don't want to be way off, like investing now and having the markets lose an additional 20%.

I'm mostly looking at very long-term investments, like for my retirement 40 years from now. However, I'm also thinking about how I might want to change my portfolio, based on the possibility of me taking out some money from the Roth, to pay for grad school, since I won't have to pay the penalties. I haven't thought too hard about this, whether even the increased student loan rates will be high enough to offset the potentially greater gains of leaving the money invested.

Djeet wrote: »

If you're going to have an investment strategy of long-term holding of broad-based indices with primary weightings between U.S. and World (my guess from your post), instead of trying to bottom-guess you might try to think about how you want it allocated (e.g. 50%/50% U.S./World, 40%/30%/30% U.S./World/MM Prime, 30%/30%/40% U.S./World/C.D., etc) and then re-visiting once/twice a year to rebalance the weightings to changes in valuation or changes in how you want to weight things.

Edit: One thing about holding foreign funds in US-tax-advantaged accounts if that you cannot file for a tax credit for the foreign tax withheld. So to be most tax-efficient you'd want to hold those foreign funds in US-taxable accounts if you can.

Yeah, I'm not really sure on how I want things allocated, other than diversely. VFINX is the fund I currently have, and VFWIX actually is what I was thinking about buying, and I do have just enough money to do a roughly 60/40 split, even considering minimums. This is all in a Roth IRA.

I'm not sure what you mean by making sure to hold it in a US Taxable account. I mean, the money has already been taxed, but I guess the gains on the money from now on would not be taxable as it's a Roth.

Liquid Hellz

I found this article interesting. How could oil prices not go back up?

http://articles.moneycentral.msn.com/Investing/MutualFunds/why-gas-prices-will-soar-again.aspx

Djeet

Septus wrote: »

I'm not sure what you mean by making sure to hold it in a US Taxable account. I mean, the money has already been taxed, but I guess the gains on the money from now on would not be taxable as it's a Roth.

A fund that trades foreign securities must pay taxes on gains/dividends to the respective governments. So every year you hold a fund trading foreign securities you'll get a tax document showing foreign taxes paid (usually broken down by country). If the fund is in an IRA/401K it's of little value other than trivia. If the fund is held in a taxable account, when you file your taxes you can claim these paid foreign taxes as credit against tax owed.

A taxable account being an account you open at Bank of America/Vanguard/Fidelity/T.Rowe/wherever that lets you trade securities and is NOT an IRA/401K or other tax-deferred account.

If all your investing is going to be in tax-advantaged accounts (IRA or 401K Roth/Traditional) then don't worry about it.


At heart your concern is still one of market timing. Anytime you buy, it could fall 20% afterwards; I'm not saying it's best for you to buy now, it's just that concern/possibility will always be there. I expect a positive blip up in domestic markets after the stimulus bill is passed. OPEC has signaled a production cut to get oil above $70, though it's unclear if they will be successful. Financial markets will not appreciably improve until there is optimism amongst the investment community that the credit markets and banking situation is stable (6-18 months seems a popular guess right now). I speculate a market rally will precede any recovery or real job creation, but as to when, that's a timing bet.