So, what do you do exactly?
Just buy shares of an index fund at a regular interval and wait. In about 15-20 years will start selling and using it during retirement. If my circumstances were different I’d invest in one of those Vanguard or similar Lifecycle type funds that automatically reallocate over time.
Trying to figure out when to buy and sell for something like day trading or short term investing requires the ability to accurately know too many impossible to know variables. Human psychology is a factor of pricing and that’s incalculable.
Not to speak for @octopus, but IIRC he bought stocks when the market fell in value during the pandemic, reasoning that it would recover. And it did.
I did. I mean everyone in the world was panicking so that was the one time I felt it was not too risky to deviate from my own plan of not reacting to world events. Aside from a true civilizational collapse or worse, in which case investments in equities or bank accounts would be meaningless, the market would recover in time.
This. If you believe that fed may step in and lower interest rates, which it can actually do now, then buy. You might not hit the min but we fucking had cartoon character Donald Trump as president and might again. I wouldn’t be scared on buying mutual funds at all right now.
This doesn’t make sense. Either you’re holding cash on the side to wait for a market downturn and pounce, which means you’re essentially market-timing and probably missed out on the prior years of huge market increases, or your portfolio already took the hit and you have to wait for the recovery.
In any case, the reason why stock values are down is their reduced expectations to generate cash about their cost of capital. Sure, you get more shares, but they’re obviously worth a lot less. At least that is what the market is telling you.
Point is, the number of shares is irrelevant.
It makes sense if you’re carrying on with dollar cost averaging as you have in the past. Automatic witholding/deposits from your regular paycheck are a good example. Market went down? Cool, I get more shares for my dollar over the next few months/years, and I have a reasonable expectation that the market will recover in the longer term.
As @Octopus said, human psychology is a major part of stock price fluctuations. Benjamin Graham said it:
“In the short term, the stock market is a voting machine. In the long term, it’s a weighing machine.”
Investors tend to wet their pants when there’s a real market downturn, and they sell and make the downturn in share prices even worse than objective facts suggest they should be. People come back to their senses after a bit of time and start paying attention to market fundamentals, and then prices recover to the point that they reasonably match with market reality. So yes, buying when the market is down is a good thing. The challenge, of course, is knowing whether the market is down already, or still has a long way to go before it’s truly hit bottom.
For the average personal investor has no idea what the market is going to do next (which is most of us), dollar cost averaging and annual portfolio rebalancing together are a solid strategy for managing investment risk. Decide on a target stock/bond ratio for your whole portfolio, and keep salting money in from your paycheck on a regular basis. Once a year, rebalance your portfolio: if the stock percentage is below target, sell some bonds to buy stocks, and if the bond percentage is below target, sell some stocks to buy bonds. This isn’t market timing, since it happens at the same time every year and you don’t care whether the market as a whole is up or down.
Alternatively, some people use a threshold from “balanced” to rebalance. So if you want to be 60% in US stocks, you might trigger a rebalancing event if you hit 55% or 65%. There are often costs associated with rebalancing (but not always) so there may be reasons to not want to do it too often. There is also the psychological/behavioral risk of looking at your portfolio too often (especially in a downturn).
I don’t think anybody has hit on the “optimal” rebalancing strategy, so once or twice a year is probably as good as anything.
The general advice I’ve heard is to do rebalancing within your tax-deferred assets (401, 403, TSP, etc.) to avoid incurring a tax bill every time you sell something at a gain.
Oddly, I’ve never had that problem. I generally update our spreadsheet once a month, and the ups and downs (especially the screams of financial terror on the evening news) mostly have entertainment value to me. Maybe I’ll feel differently when we retire and start depending on that nest egg for our living expenses, but somehow I doubt it.
Yep. This is what I’ve done since starting investing about 20 years ago. It has served me well. I believe my influences were mainly Warren Buffet’s advice to standard investors (buy low-cost index funds; don’t try to time the market), and reading through A Random Walk On Wall Street (which there are some criticisms against.) It’s worked well for me, and it’s completely low stress. I don’t care about market drops or fluctuations. After a large initial investment, I just throw money in regular intervals into my accounts and look at my statement maybe once a year – sometimes even less often than that. I rebalanced a little a few years ago to more bonds (as I’ve aged), so I did lose some growth as the market continued to climb. I’m still about 20 years out from retirement and don’t need the money any time soon, so I’m not concerned. One of my Vanguard funds is a target retirement fund that automatically rebalances. The bulk of my holdings are just in a Vanguard S&P and total stock market index. I don’t have the desire to stress about market fluctuations so this suits me. My parents dumped most their stock during the crash, which I warned them against doing, though I understood being closer to retirement age. But they’d have double the money now if they just held fast. (They sold pretty close to the bottom.) And – at least in theory – current market prices do factor in perceived sentiment about the direction of the market. If a lot of investors think the market is too low and think it’s time to buy, you’ll see that reflected in the prices.
So don’t stress yourself out. Invest in low-cost index funds that reflect your risk tolerance (allocations should skew more towards bonds [or similar] as you get closer to retirement age). Contribute to those funds regularly. Reinvest your dividends. Don’t try to time. That should be good enough for 95% of investors. My target is 8-12% annual return over the course of 30+ years, or about 7% after inflation. That doesn’t seem like a lot, but it is over a long time period. People want to see ridiculous returns of like 20% to doubling annually or more. Go to Vegas if you want a chance at that. (though you’ll lose most of the time.) My numbers are sensible and much better than keeping your money in savings.
Yeah, that’s typically what I try to do (or even better rebalance using new contributions). But sometimes that’s at odds with tax-efficiency in placing investments in the right account (or there may not be a low-cost option in the tax-advantaged spaces). Some of those issues (but not the low-cost one) are all extremely minor compared to the major decisions of how much to invest and what types of investments to use (and, perhaps most important, staying the course). And analysis paralysis is much worse than doing the slightly sub-optimal thing.
I think the answer to the OP could actually be summed up by Jack Bogle’s market advice: “Don’t do something. Just stand there!”
Have you considered timing the stock market in order to buy and sell with the best results? 
Seeing that market forces are based heavily on greed and fear*, and stress short-term results over long-term advantages, it seems like questionable advice for anyone middle-aged and older to get “aggressive” with stock investments.
*my favorite examples from 2022 include the one-day surge when the Fed raised interest rates (“they’re controlling inflation, it’s grand!”) followed by a crash the very next day when these dopes had a few hours to reflect on the possible impact on the economy. And then we’ve had recent major declines occurring on the release of positive economic news like stable to increasing employment, because that could mean more interest rate hikes in future. “The economy is good…that could mean a recession!!!” Ask yourself: do you want to put a lot of money at risk from this roller-coaster ride of ineptitude and panic, especially if anywhere close to retirement?
I followed the strategy that a few people mentioned in the last several posts. I maxed out my 401k for 30 years putting money in index funds. I retired 2.5 years ago at 56.
Now things are much more conservatively mixed. I’m down year to date but not nearly as much as the market. I have a financial planner doing things like Roth conversions and keeping my taxable income at a point where my ObamaCare premiums are free.
This is the flaw in your logic. Sure, the market will recover, but you will never regain what you lost when the market dropped. That’s gone forever. And there is no logical reason to think that a market drop or correction will ever lead to a stock becoming even more valuable than the path it was already on before the market drop.
And yes, the effect of a consistent pattern of investment such as a monthly payroll deduction into a 401(k) has the effect of “dollar-cost averaging”, but that’s not really the point of dollar-cost averaging, as your payroll deductions are probably being allocated to a diversified portfolio anyway. Dollar-cost averaging is more of a risk management strategy for investing in something like a single stock that you intend to have a higher weight than everything else you’re investing in.
The only benefits that a market drop could possibly generate are wiser monetary or fiscal policies, better market efficiency and fairness, etc. that perhaps could prevent future market volatility, that would essentially help elevate market values across the board.
That seems like a lot to me. Good luck!
I’m at 8% now, looking at my portfolio. This year took a little hit – I think I was averaging 10% last I checked a couple of years ago. This is not factoring in inflation (ETA: looks to be about 6.5% after inflation). This is right about where I expected to be, and in another 20 years I expect the overall return to eke back up. Historically, 10% is about what you can expect in the long term from the S&P over 30 years. The worst 30-year period was about a 7.75% return. The best periods have been almost 15% over 30 years. Of course, past performance does not guarantee future returns, yadda yadda.
For the sake of all that is holy, do NOT put much weight into my opinions on this. I am just some schmuck on the Internet and do not even work in Finance. Yes, I have done well since I started investing back in the early 80. So much that I could retire early and I have outperformed the vast majority of mutual fund managers, stock advisors etc. Yes, I am very proud of this…but I still admit I am no expert on anything like this. Please take below for what it is…my thoughts…and no more.
You will hear about not timing the market and trying to is bad. That being said…I have done well ‘timing’ the market. I got to miss out on the debacle on 1997 and 2008 completely because the techniques I used showed something bad was coming and got out…then got back in 1998 and 2009 to good effect. So, I am a believer in timing the market. HOWEVER, my ‘timing’ is in a time length of months if not flowing over into years. Trying to time for even a few month block…no.
The reason you don’t want to time the market is that 90%+ of the people get it wrong. People get in when they should be getting out and get out when they should be getting in. Also, if you missed even just the TEN BEST DAYS of the market over the last 20 years you just lost a huge % of gains. Last time I checked it was over 50%. So, unless you have some experience and it is working, it is best not to time the market.
That being said (again)…the philosophy I follow is still keeping me mostly out at this time. Even with this significant downturn over this year it just…doesn’t look the best to get back in so I am about 16% ‘in’ right now. This is unusual historically for me because over my lifetime, bear markets tended to be mostly quick recoveries to new highs.
Now I will veer off into complete speculation. I am getting old, even more cynical and despairing of the future and emotions are one thing you need to drive out of yourself when you invest. It is what causes you to usually do the wrong thing. However…I have also noticed that markets do tend to signal when it is business as usual - this has happened before. I have also noticed the market doesn’t do so well on things that have not happened before.
This is where I get cautious. I don’t think the market has adequately priced in the possibility the USA might not even exist in 3 years…and the possible turmoil such a breakup will cause. I don’t think the market has adequately priced in an aging population and the effect it will have capital and credit. I am not sure the markets have aedequaely priced in the fact that the USA seems to be wishing to withdraw, at least somewhat, from the world EVEN IF the USA doesn’t fragment. The USA really has been instrumental in keeping world trade ‘at peace’ and relatively safe and that time might be starting to pass. If so…
Well…I worry that the stock market might have peaked for a generation. That is dire. I hope I am wrong. I probably am because when you go by emotion, you are almost always wrong via the markets.
I feel for younger people. You REALLY need to have been and be doing very aggressive mutual funds and such. If you haven’t or don’t, then you really risk missing out on much. However, if my older age pessimism is right…
I feel for you. I am not sure what you should do. It’s tough. I still remember May of 2009 when my technique screamed at me to re-enter the market. If you remember that time, it was doom and gloom, the end is nigh times. However, I set aside my emotion and went back in and it was the right decision. All I can say is that RIGHT NOW, my techniques are NOT screaming at me to get back in and that is all I can really say.
After rereading.
If you are working and putting a small amount of every paycheck into a 401k…and you are under 45 or even older…you should be putting 100% into more aggressive funds - Growth, Value or World. My babbling above is more for if you have a significant chunk of money and wondering what to do.
I have never read anything that suggests dollar cost averaging is primarily a tool for single stock investing versus diversified indexing. Do you have anything that would support that?
My point was that when you’re investing a fixed amount into the same investments every month, it’s naturally dollar-cost averaged, so not really a strategy. But for the work I do, I’ll often get a large stock distribution from a private equity fund that I don’t intend on holding. The traditional financial best practice is to sell all the shares as soon as you can. But I will often dollar-cost average out of it so as not to get stuck selling at a single price (which could be low). That’s a strategy, and it’s based on looking at the technicals; e.g. moving averages, float, qualitative issues, etc.