Investing in a Stock Index Fund in the current market

I have a question regarding investing in the current market. Because I am brand new to the world of investing and don’t have much knowledge, please don’t flame if my question sounds asinine. I recently invested 10K into the Vanguard 500 fund and have gained ~$800 in the past 10 days. Given the current market and thoughts by many that there will be negative growth in the economy until at least the middle of 2009, do you guys think it’s better to cash out now or should I just keep my money in the fund and ride it out? Thanks.

I’ll try to answer your question. While conventional wisdom suggests buy and hold index funds, it is never wise to lose money. If you truly trust these thoughts by many with how you are managing your money, then it may not be a bad idea to take some gains now, hold the sum a money market, and then invest during the middle of 09. However, many big name investors (Buffett included) suggest a low cost index fund with a buy and hold strategy. Keeping your money in the fund will earn you dividends in the meantime too. Timing the market is very difficult and those whom can are usually rewarded handsomely. Aside from the timing aspect, you would be liable for short term capital gains for pulling your money out. These taxes are less friendly than long term capital gains (for now). Also, we would need to know more about your situation. Do you need the money in a short time span? Are you comfortable with an equity fund’s risk level? And so forth.

So if anyone really knew what the stock market was going to do, we could make infinite money. Does making an utterly taxable 8% cause you to change the reasons you invested in the first place?

Just make it rain bro, make it rain

Don’t forget to include any cdsc fees you may have to pay for such a short holding period assuming you’re in a traditional brokerage account. It’s Vanguard so the fees are probably minimal. VFINX is a nice fund. 14bps in fees per year is hard to beat.

Assuming you have a longer time horizon, I would leave that money right where it is. When the market comes back, it comes back fast, timing it right is incredibly difficult. You’d be better off playing slots than trying to time the market.

Chi Paul Wrote: ------------------------------------------------------- > Assuming you have a longer time horizon, I would > leave that money right where it is. When the > market comes back, it comes back fast, timing it > right is incredibly difficult. > > You’d be better off playing slots than trying to > time the market. If this is what you believe, how are you in this business? Timing the market isn’t all its thought to be. In this situation, its not timing the market, its a matter of making a gain in a bear market and making something is rare in this market. I’d say sell based on the fact that we are LIKELY going lower. It comes down to your risk profile and whether you believe 8% to be a good return for a year and look to enter at the same or lower position. Too many people are afraid that they are going to ‘miss out’ on a big rally, EXPECTING a rally just like we’ve seen in the other small recessions of the past. This is unlike anything we’ve seen, ever, don’t expect a rally, don’t get crushed, take gains when you are deemed worthy of them, and remain cautious. I see those who buy and hold at this point playing a much riskier game than those with stops on the up and downsides. At least if the market loses 90% of its value from here, the guy with stops can buy 10x the number of shares as the guy who bought and held. Buying and holding is risky, unless you have cash like WB and can get in those positions where you basically manage the companies you own.

How could I be in this business when I advise a novice investor to not attempt to time the market and not change their whole investment strategy based on a 10 day return?!? You think he/she should take the 8%, get pounded on taxes, and then just make stops on the up and down in the right spots? Might as well advise to buy low and sell high. I mean, I get your idea, but it’s not obvious to me that it is so easily implemented, especially by a novice.

I suppose. The bottom line is that a novice shouldn’t be entering the market at all at this stage. This is not a buy and hold market. Its a bear market until we see evidence against that. I will however give him a retroactive suggestion to not enter the market 10 days ago so thereby take the money and do your homework and make and stick to a strategy before entering the market again.

MattLikesAnalysis Wrote: ------------------------------------------------------- > I suppose. The bottom line is that a novice > shouldn’t be entering the market at all at this > stage. This is not a buy and hold market. Its a > bear market until we see evidence against that. I > will however give him a retroactive suggestion to > not enter the market 10 days ago so thereby take > the money and do your homework and make and stick > to a strategy before entering the market again. If you have a long time horizon, buy-and-hold might not be bad right now. The key is to enter the market slowly, since downward movements are still reasonably likely. That way you have some exposure at relatively low valuations, but don’t have all your money exposed in case there is a sudden lurch downward. When people have asked me what to do, I point out that 1) it depends a lot on your needs and risk tolerance, but 2) if you do want equities in your strategic allocation, it might not be bad to figure that the bottom will probably come between now and 6 months from now, therefore divide up the amount you would normally expose to equities and invest it in equal portions over that time. Actually, since the bottom might not come within 6 months, you probably want somewhat less than your total equity allocation to be exposed - maybe 80% exposed, and 20% until you feel strongly that we’ve passed the bottom.

^^^ the question in my mind is whether saying that violates any of the CFA standards… if so, I’m not knowingly violating them - I’m just suggesting strategies consistent with my views on the market, and pointing out that it depends a lot on individual requirements and risk tolerance.

None of this advice is meaningful until we know what you are investing for. When do you need the money? If it’s not for 5 years or more, just hold it and don’t look at it for the next 3 years. Historically the market smiles upon those who buy stocks at these valuation levels. Many very accomplished investors, like Jeremy Grantham and John Hussman, are predicting 10% or more annual returns over the next 7-10 years. If you need the money within the next 3 years, put it in a CD or maybe a municipal bond fund, you don’t need stock market risk.

bond markets have plenty of risk right now as well…

For a short time horizon, I like investment grade muni’s a lot right now. They have been pummeled for many reasons beyond fundamentals and are providing higher yields than taxable treasuries in many cases.

Chi Paul Wrote: ------------------------------------------------------- > How could I be in this business when I advise a > novice investor to not attempt to time the market > and not change their whole investment strategy > based on a 10 day return?!? > +1 chiPaul