Investing Advice - Limit Orders

Some advice for a newbie to this tool would be much appreciated.

The History

I started investing in stock markets ten years ago this month, sigh, with a large amount of cash, and what an interesting time it has been. I didn’t make the cardinal error and sell at the bottom, although one of my mutual funds was wound up near there and I’d tuned out of the markets because it was so stressful, so didn’t reinvest the paltry returns. Since around mid-2009 I’ve been dollar cost averaging into some blue chip high yield stalwarts and a world tracker ETF by Vanguard. Now markets are looking pricey and also tempting, and I’ve got a lump of cash burning a hole in my savings account.

What Now?

So, I thought I’d put it to use and buy something that looks cheap, but the only thing that looks cheap right now is cash! I don’t want to liquidate my current assets (about 40% vs. 60% cash) although they’re looking expensive, but I don’t want to just sit on my hands either. The last thing I want to do is put a large amount in markets and watch the value slide for the next 18 months.

The Plan

So the plan is to maybe sell some equities if markets drop below their 200 day moving average, but before that happens set Limit Orders to buy a world fund at -5, -10, -15 and -20% of today’s price. I set a limit order - my first - today at -5% with just 2% of my cash, and wanted to check with some people here before I go and set up more of them.

So, anyone with experience of doing this? Nobody I know has!

Thanks!

I’ve been in the market for more than thirty years, and the advice I give my children and grandchildren is the advice I derived from Jack Bogle’s statement about market timing;

Don’t try to time the market. It can’t be done. Buy three index funds and sit on them. You want a total US index, a total international index, and, depending on the amount of time you have before you need the money, a bond index.

What you’re trying to do is market timing. You’re sitting on a pile of cash undergoing opportunity losses on a daily basis. Year-to-date the Vanguard Total Stock Market Index (VTSAX) is up 13.95%. The returns for the last 12 months were 18.63%. Any money you’ve had sitting around since then you’re already that far behind, minus the maybe 1.25% you got for leaving it in cash.

Sure, the markets are at unprecedented levels. So what? You could have said the same thing at most times in the last few years.

I was tempted 12 months ago when I retired and took seven figures out of my 401k and transferred it to an IRA. I thought the market was really high, and maybe I should just hold some cash for the inevitable drop. Had I done that I’d be more than one hundred and fifty thousand behind right now.

If you get in today the markets could drop like a stone tomorrow, there’s no guarantees, but if you have at least seven years before you need the money 93.9% of the time you’ll come out ahead. Here’s an interesting tool to test that. Scroll a little down the page to the Returns by Various Investment Periods in the S&P 500.

The advice I’ve heard is to divide your investment up into sectors, with a fixed percentage in each sector. The, whenever you add more money (reinvestment of dividends or new money), you invest it to keep the same percentages you had originally. Likewise, when you need to liquidate, you sell in such a way as to keep the original percentages. This will naturally lead to buying low and selling high.

As an example, let’s say that your sectors are tech stocks, ag stocks, and energy stocks. You start with equal amounts, say $1000 in each. After a year, suppose that tech has gone up 10%, ag has gone up 5%, and the energy is down 3%. Your total investments are now $3120. And suppose that you now have $480 more dollars to invest (whatever the source). Well, that means that your investment total will be $3600, so you want $1200 in each. So the best use of your money is $100 more in the tech stocks, $150 more in the ag stocks, and $230 more in the energy stocks. The net effect is that you’re spending less on the tech stocks, which are currently high-priced, and more on the energy stocks, which are currently low-priced. Now, it’s possible that the tech stocks will just keep on going up more and more, but that’s OK, you still have some tech stocks to take advantage of that (in fact, you still even bought more tech stock than you already had). Or it’s possible that the tech stocks will come back down, and then you’ll be glad that you didn’t buy too much of them when they were high.

EDIT: Of course, in the real world, you’d make it more complicated. You wouldn’t just have three sectors of investment, but many, dividing it up not only by type of industry but also by amount of risk, and you probably will vary your percentages somewhat as your needs change (for instance, if you’re at the start of your career, you probably want more risk than when you’re nearing retirement). But the same principles apply.

Moving to IMHO.

Thanks for your replies.

Hi Bill Door, thanks for your reply. I appreciate Jack Bogle’s quote but I know of a more successful investor who’s currently sitting on a cash pile of $100 billion, and although his approach wouldn’t be called timing the market he doesn’t make purchases when things look expensive. Yes, I could’ve put more cash to work earlier and have more wealth now, but I didn’t. That’s no reason to be going all-in now (I think that’s what gamblers call chasing losses), but I’m still dollar cost averaging into some blue chip high yield stalwarts and a world tracker ETF by Vanguard, as I have been the last 8 years. My cash pile’s almost doubled recently, due to a relative unexpectedly returning a loan.

Chronos,what you’re describing is rebalancing so you have predetermined levels of each sector. I’ve heard this is a very good way to keep a portfolio ‘healthy’, but I’d rather use a passive methodology so I can keep more of a distance from the markets, so as not to be subject to the emotional side which brings bad decision making. Thanks, anyway.

So, anyone have any experience with Limit Orders?

Yes. A limit order is just an order to either buy or sell when or if an equity reaches your specified price (‘limit’). I usually have several pending. I don’t hold very many stocks for a long term, just buy when I think they are cheap and then put a sell limit order on them so they sell when they raise by a few pips. My way is quite hands on but you can use limit orders any way you like.

Just thought of something else, Bill Door; with your choice of funds you may be heavier in the US than would be thought of as a balanced portfolio? My world tracker is weighted 51.3% US stocks, if yours is too then you have…er… a lot (math is hard) in the US. My reasoning for using a world tracker instead of country-specific is that the only investment that can be held forever is the broadest market index fund available. I’ve been told in a 401(k) that may be an S&P 500 index fund. In an IRA that will be the ETF VT or a combination of VTI, VEA, and VWO. Why broadest? With emerging and developing markets, who’s to say a Chinese or Russian company isn’t going to knock an American or European one off it’s perch as number 1? Surely foreign companies can employ scientists/engineers from other countries and use state sponsorship and steal IP from the west?

Also bonds are great when interest rates are declining but their value drops if interest rates go up. They’ve been in a bull market for, what, 35 years now? Long-term, interest rates are very low and, long-term, they could start going up like they did from the early 60’s to 1981. Maybe inflation-linked bonds would be a wiser choice right now, if they exist?

Again thanks for your reply and I hope you don’t see the above as being contentious, but just chewing over different aspects of investing.

Isamu, thanks for that. This is the first time I’ve set one so was looking for any thoughts on them. With my account they expire after 90 days, what would the method with least resistance/effort be to reset them, and do you find you change them if the market changes? For example if the market and/or the specific equity goes up significantly would you set the price higher, cancel it or leave be?

Hi Justin. I always set my limit orders to never expire and I price them to sell fairly quickly. I try not to fiddle with the prices too much because I never sell to a loss and I don’t care about maximising profits just about making my target profits. It’s not everyone’s trading style but it suits me.

The international index I hold is VTIAX. It holds stocks from more than 45 countries in both developed and developing economies exclusive of the United States.

The US index I hold is VTSAX. It includes the entire US stock Market, including small, mid-cap, and large stocks. It is much broader than a S&P Tracker fund, it holds shares in 3,626 companies from 10 different sectors.

I do hold twice as much in US stocks as I do international, but the US economy is currently the big dog, and although YTD the international stocks have performed better the one year, three year, and five year performance of the US index has outperformed the international index.

Because I’m currently in retirement the bonds I hold are intended to provide a stable source of income. I’ve calculated what I need to pull from retirement savings annually. My investment strategy is to hold two years worth of money in money market funds, seven years worth of money in bond funds, and everything else is in stocks.

It’s a little different than most people would advise because it’s not based on fixed percentages. Most advisors go with something like 100 - your age in stocks, maybe 120 - your age if they’re risk takers. To me, this is both too risky and too cautious.

If someone who is sixty-five needs to take $20,000 a year out of savings and has only $200,000 saved, that person can not risk 35% of that money in stocks. The risk is too high.

Conversely, if that same person has $2,000,000 saved, that person doesn’t need 65% of their money in bonds. That’s way too cautious and leaves opportunity gains on the table.

My stock/bond percentages aren’t fixed. Any income, dividends and the return of capital generated by the stocks and bonds are deposited in the money market account. All withdrawals come from that same money market account. Once a year I rebalance. I’ve been retired a little over a year now, and so far I haven’t had to sell anything. In fact, the one time I rebalanced I bought both US and international stocks.

I did the individual stock thing for a long time, at one time I held more than 40 individual stocks, but it really required a lot of attention and didn’t provide a significant enhancement to the revenue stream.

Yes, Bill, I agree being so overweight in bonds can be the wrong decision when these days people in retirement often see so many market cycles. I cannot see anything wrong with your allocation either, especially with multinationals being what they are a lot of the companies in the S&P earn plenty outside of the US.

I would make a couple of counterpoints:

Most importantly, this type of advice is valid for disciplined and committed investors such as Jack Bogle and apparently yourself. But it doesn’t work nearly as well for more tentative “retail” investors.

You see this again and again. The markets go up for a while. All you read about is how this stock is up 29% since June and the other stock is up 32% since March. Guys all over have made vast amounts of money by buying earlier in the cycle. And in this atmosphere, the Way to Get Rich is to invest, so people think hey I may have missed out on the bottom but I’ll buy for the long term and “if you have at least seven years before you need the money 93.9% of the time you’ll come out ahead” etc. etc. etc.

Then at some point the market tanks. The atmosphere changes. All you read about is how this stock is down 29% since June and the other stock is down 32% since March. There are all sorts of allegations floating around about how the market is rigged against the Little Guy. Some analysts suggest that past stock market increases will possibly never repeat, due to fundamental changes in the US and global economy. Guys all over are talking about how they have to push off their retirement because of their losses. Investing in the stock market comes to be seen as higher-class gambling. And all sorts of guys who bought at the top decide that that’s it, they’re done with stock market investing, from now on they’re only going with things which are FDIC insured, if they don’t decide to keep things in their mattress.

That lasts another few years. Then the markets go up again, and the cycle continues. And these poor guys have bought at the top and sold at the bottom.

In sum, if you’re sure that you won’t change your approach whatever the market does, then that’s a very valid approach. But if you’re not, then that’s a potential disaster.

Second (and less important) point is about the nature of timing. If you’re going to be putting aside money for investments on a regular basis, then dollar cost averaging (or something similar) is a workable way to avoid market timing. But if you’re starting out with a big pile of cash to invest in one shot, then you’re making a bet on the market timing. You might be better off dividing that sum into smaller amounts and averaging into the market over a set time period.

Some advice I was recently given by an ex-financial adviser (retired, chatting to me on Seeking Alpha) was helpful, at first he wanted me to put my cash in today. Once I explained that was not possible he offered an alternative of 1/4 now, 1/4 after a 5% fall, 1/4 after a 10% fall and the final 1/4 after a 15% fall.

That was much more appealing to me, which brought me to start this thread, than him saying he had made a million dollars by going all in and throwing some percentages to back up his claims. I’d rather have a lump of cash to buy stocks when they’re cheaper than chase a trend which by many metrics is unsustainable.

Yeah, but that advice would have made the same amount of sense three years ago. If you’d followed it then you would have put 25% in and still be sitting on 75% cash waiting for that 5% drop. You’d have given up three years worth of annualized returns at 10.7 percent. You’d have to wait for a 35% drop to get back in at the price you could have gotten in 2014. It’s not timing the market, it’s time in the market.

It might make some sense to divide your money up into equal investments and trickle it in over the course of a year, but waiting for a drop is a good way to let inflation chew away at a pile of money sitting in cash.

The rebalancing Chronos describes is very passive and emotion-free. Once or twice a year, you do some very simple arithmetic and sell one fund to buy another. I’ll guess Vanguard even has tools to automate this.

As others in the thread have indicated, dollar-cost averaging is better (and more passive and less emotional!) than your limit-order approach. However averaging in a large sum over 12 months isn’t as good as averaging it in over, say, 5 years or even more. The concern is that you’d be losing returns on the uninvested money over those 5 years.

But there’s a solution to that. While waiting to trickle your money into funds which track the broad average, make investments which have low correlation with the broad market. Good choices would include investments other than stocks, but let’s just consider U.S. stocks likely to do OK if the market falls. “Beta” is a technical indicator which will help you identify such stocks. There might be funds which specialize in low-beta stocks, but it might be easier just to pick a half-dozen companies yourself.

Walmart has a beta of 0.3 — people are more likely to shop at Walmart when the economy is in the doldrums; over the past ten years WMT has never dropped to its 2007 low. Duke Energy’s beta is even lower than Walmart’s. Pepsi and Procter-Gamble each have beta of 0.7: people buy toothpaste, soft drinks and potato chips no matter what the business cycle. Extend your screen to a beta of 0.8 and Johnson&Johnson may appeal.

So there is a way to “have your cake and eat at least some of it” despite the risk of markets crashing. Perhaps other Dopers will mention some other “low beta” options.

I disagree, markets were much lower three years ago. Looking at the same metrics, the likelihood of putting a lump sum in back then and not receiving a return higher than in bonds or a savings account was much lower. I certainly wasn’t as heavy in cash back then either, for the last four years I’ve been in a very fortunate position, so now am looking at various routes. I will up the amount I put in each month, as if I don’t the situation will encourage me to do something rash. I’m just the right age to be buying a sports car and a new wardrobe that’s too youthful.

Thanks septimus, I’ve been buying blue-chip, high-yield, low volatility and low beta stocks for quite a while, they’re in consumer staples, tobacco, military, health, property, and booze. Unfortunately although rebalancing is good advice I *could *make it emotional!

The problem is that you would have tax consequences from selling the better performing stocks/funds.

What Chronos was suggesting was keeping the balance by weighting new investments towards sectors which are a lower share of your current portfolio, without selling anything. This would not cause any taxable gains. On the other hand, that approach would likely only work in the very beginning. After a while, the ratio of new investments to current portfolio will be low enough that your new investments will be less than the disparity that you’re trying to even out.

Back when I was investing in individual stocks rather than indices I would park money I wouldn’t need for a few months to a year in AT&T (T). The beta was low, right now around 0.55, and the dividend high, currently 5.85%. The only problem was doing this in taxable accounts meant short term capital gains uglied up my taxes. On the other hand, having capital gains is kind of a high class problem to have.

AT&T doesn’t look like a great candidate for this now, the whole mobile telephone revolution has introduced a lot more volatility than I’m comfortable with in that whole industry, but as you say, there are a lot of potential candidates for short term holdings that return many times the paltry amount you’ll get from a bank.

I’m actually thinking of getting a bit into T now that it’s come down a lot. Apparently the market is not keen on the TW merger, but that may be a temporary issue for a high yielding blue chip company.