I got an email a few months back that seemed like it would make for an excellent blog post as I think this situation is actually pretty common out there. Here it is, with any possible identifying information redacted or changed.
Q. Should I Get Back Into the Stock Market?
I am 11 years out of residency and have made many of the mistakes you have listed on the site. The primary one was getting OUT of stocks entirely with the 2008 crash. Oi. Now I have all this cash and some bonds and I want to reinvest, slowly, and think the market is overvalued. I hate the thought of getting back into the market, then losing 20+% in the next correction. But also the market is going up up up!
I've maxed all retirement accounts, including my SEP, most years–all the past 10 or so I think but I've lost a lot of it. I'm in solo practice. But most of my cash is currently not in retirement accounts.
I HATE financial advisors and want to do this asset allocation myself. So far I've invested in Vanguard bond funds, REITs, and the rest is in cash right now–way too much to be just sitting around.
On my non-tax protected cash I really want to earn 3-5% on it. Not anything crazy, but definitely safe and steady growth. I was thinking of just using Vanguard tax-exempt bond funds.
Do you have suggestions for those of us out of the market right now? I don't see that on your blog lately. I know you have some simple investment recipes, but none I see addressing scared people who want to eventually get back into stocks–I am thinking of just doing the 500 Index Fund, just something simple with low fees when I do reinvest into stocks.
Don't worry, I also have some real estate, but that is mostly an accident, I actually hate managing real estate but keep the properties so we can use them ourselves once a year or so.
A.
I think getting the response to this post just right is really important. Helping people like this is what I really want to do with this site, rather than just helping someone tweak a nearly perfect portfolio so they can retire 3 days earlier. Sites like this are magnets for people who live and breathe personal finance and don't need all that much help anyway. But this sort of a situation….this is where I can really make a difference. So if you know someone in this situation, please feel free to forward this post on to them.
I'm going to hit the easy stuff first and then deal with the major issue at the end.
There Is No 3-5% Cash Option
First, we would all like to earn 3-5% on our cash. The problem is that you only get to choose from what is available in the market. Back in 2007, I think my Vanguard Prime Money Market Fund was paying 5.25%. That was great. But it hasn't been available since. As I write this in September, it's paying 1.12%. The tax-exempt money market fund is paying 0.75%. Ally Bank, a good example of a high-yield savings account, is paying 1.20%. Maybe you can find a 5 year CD paying 2%. But there's basically nothing cash-like out there paying better than that without a catch like a high-yield checking account with a $25K limit requiring a dozen transactions a month or a whole life insurance policy with negative returns for the first decade.
The market doesn't care what you want. You get to select your risk level. You don't get to select your return. You get the return that comes with a given risk level. With the cash risk level, you get 1%. Not 3-5%. Sorry.
Bonds Aren't Cash
Bonds are a lot less risky than stocks, but they certainly aren't cash. They do go down in value. For example, the Vanguard Intermediate Tax-Exempt Bond Fund lost 1.56% in 2013. It lost 3.28% in the final quarter of 2016. Both bonds and cash can reasonably be used in a retirement portfolio, but they aren't interchangeable.
REITs Are Stocks
You indicate that you got out of stocks in 2008. Then you indicate that you actually own some REITs. REITs are stocks and publicly traded REITs are part of the overall stock market. So you didn't actually get out of and stay out of the stock market in 2008. You just changed your stock asset allocation from a diversified one to a very undiversified one. Now, there may be some good reasons to overweight REITs in your portfolio, but I know of no reputable investment authority who recommends your stock allocation be 100% REITs. I'm actually surprised to see this, since REITS tanked MUCH harder in 2008 than the overall market. I think my REIT fund lost 78% from peak to trough.
SEP-IRAs Are Less Than Ideal
I comment on this every time I see it, but it is a rare doctor for whom a SEP-IRA is a better retirement account than an individual 401(k). You can max out a 401(k) on less income, it allows you to do a Backdoor Roth IRA on the side, and it may get a little better asset protection in some states. The only downside is really a very small amount of additional paperwork and sometimes some very minor additional costs. Nonetheless, I'm glad to hear you're maxing out your retirement accounts (well, excepting a Backdoor Roth IRA.) It turns out at your stage of the game (early to mid-career) that how much you save matters far more than what you invest it in.
Real Estate Can Be A Great Investment
Teach them risk tolerance at a young age. It's a valuable skill.
You mention your real estate investments. Real estate can be a very profitable investment and is the usual refuge for smart investors who have an inordinate fear of the volatility of the stock market with its daily repricing. However, it is usually only a good option for those who love it and are interested in working in it. If you simply see the value of an investment with a solid return and low correlation with the overall market, you may wish to explore some other ways of investing in real estate that don't involve landlording. These include REITs, crowdfunding sites, syndicated shares, or even buying real estate directly and hiring a management team. But I see little reason for you to be investing directly into real estate and managing it yourself when you hate doing it. Sure, the vacation perk once a year is nice, but you can just rent a place for that week with far less hassle than you are having managing a rental property. Chances are good that you aren't even charging market rental rates for that property if you hate it and your renters gladly accommodate your annual vacation. You probably need a change there, whether it is hiring a good property manager or simply selling it and reallocating that money elsewhere in the portfolio.
The Value of an Advisor
It is unlikely that anyone will ever accuse me of being the most pro-financial advisor blogger on the planet. I do have a few financial advisor sponsors, but to be honest, the sum total of everything I get from financial advisors represents a tiny percentage of the WCI Empire's revenue. The main reason I sell ads to financial advisors and maintain a list of recommended advisors is because for some doctors, maybe even the majority of doctors, they provide a service with a value that outweighs their substantial cost. One of the areas where an advisor can help the most is to help us to stay the course with a good plan. In fact, even if you pay 1% a year to an advisor for your entire 30 year career, that total cost adds up to less than what you could lose with just one instance of doing what you did- buying high and selling low. Take a look at the math:
Consider an investor who invests $50K a year for 30 years and the investment makes 8%. She pays an advisor 1%, so it's really like the investments compound at 7%. After 30 years, she has $4.7M.
If she had not used an advisor, and so got to keep the entire 8%, she would have ended up with $5.6M, or 20% more. But if she sold low in a bad bear market after 20 years and lost 40% of the nest egg, and then left the money in cash earning 1% for that last 10 years, she would end up with $2 Million, just 43% of what she would have had if she had used an advisor in the first place.
I'm not saying you need to use an advisor, and I certainly don't use one myself, but if an advisor could have kept you from making your previous two mistakes (selling low and staying out) they would have been well worth their fees.
Fear and Greed
Now, let's address the elephant in the room. The Big Kahuna. The reason you're writing me in the first place.
Why did people sell out of stocks in 2008 at the market bottom? One reason. Fear.
Why did people stay out of stocks for years afterward despite excellent (i.e. low) valuations and excellent recent returns? One reason. Fear.
Why did those same people feel a need to get back into stocks 8+ years into a bull market with high valuations and many worries about returns in the near future? One reason. Greed.
Your problem is not that investing money in the market right now is a good thing to do or a bad thing to do. It's not how you invest that money into the market. The problem is that if you haven't fixed the problem that led to the original mistakes, you're highly likely to do the same thing again in the next bear market. And the one after that. And the one after that. In fact, if I were you, I'd expect your portfolio to pass through 5+ more bear market during the remainder of your investing career. You need to fix your behavior first or you're going to be unsuccessful as an investor no matter what you do this year. I cannot emphasize this enough.
Fixing Behavior
There are a few strategies that others have used to fix their bad investing behavior. Hopefully they will work for you.
# 1 Education
I think the first place to start is with education. Lots of investors are surprised when the financial world goes to hell in a handbasket. So they react to it. But even an elementary knowledge of financial history would tell you that the world goes to hell in a handbasket on average about once every 3-4 years. From 1900-2013, there were 123 market corrections (drop of 10%+) and 32 bear markets (drop of 20%+). On average, a bear market lasts 15 months and involves a drop in value of 32%. When you know this happens every few years, you know you need a plan that dictates what you are going to do in a bear market. Your investing career is probably going to involve passing though not just one or two, but more than a dozen bear markets.
# 2 A Written Plan
Now that you know what you're up against, you can write down a plan of what you are going to do. My Investing Policy Statement actually says we won't sell stocks in a bear market. I suggest you put that in yours too. In the depths of the next one, go back and review your written plan and it will help you remember why you set things up like you did, and hopefully, help you avoid bad investing behavior.
# 3 A Less Aggressive Asset Allocation
The best indicator of your risk tolerance (i.e. your ability to lose money in a bear market without selling low) is your past behavior in bear markets. In this respect, you've shown at least one thing- you couldn't tolerate going through a bear market with your previous asset allocation and level of education. We already mentioned the education bit, but it would probably be a good idea to hit the asset allocation side too. If you gave up with a 90% stock allocation, maybe you should trim it back to 50/50 or 60/40. If you bailed out with a 60/40 allocation, maybe a 25/75 portfolio is right for you. Likewise, if you are a new investor and have never been through a bad bear market like many new attendings, I would recommend you err on the conservative side until you go through your first bear. Don't worry, it won't be that long before it happens and at this stage savings rate matters more anyway. If you find it easy to stay the course, then you can ramp up your risk level in the depths of the bear market and really make a killing.
# 4 An Advisor
As mentioned above, an advisor might be able to help you avoid bad investment behavior. Of course, there's always the risk that you'll have to control the advisor's behavior too, but in general it is much easier to tolerate investment losses with a philosophical and theoretical mindset when it isn't your money. And the good advisors you should be hiring generally have high levels of financial education and risk tolerance.
# 5 Elimination of Financial Pornography
Financial pornography is basically anything that you can watch on TV, listen to on the radio, read in the newspaper, read in a magazine, or hear at the water cooler. Avoid it, particularly in a bad bear market. Those poor folks have to publish something every day, so they do. But 99% of it doesn't matter. Even worse, it is likely to lead you to have a short-term perspective that can be very dangerous in a bear market. Turn it off. In fact, you don't even have to open your investment statements in a bear market if you don't want to. That might make it hard to rebalance, but avoiding selling low matters even more than properly rebalancing.
# 6 Controls
As a last ditch effort, you might try placing some controls in your way to prevent you from selling low. Maybe it is only letting your spouse know the logins for your investment accounts. Maybe it is deleting those links from your toolbar. Maybe it is just setting your 401(k) up on autopilot. Just like freezing a credit card in a block of ice (or freezing your credit) keeps you from going into debt, making it harder to see what your investments are doing on a daily or monthly basis and harder to do anything about it can promote good investor behavior.
What Now?
Okay, so what should you do now? Don't do anything quickly. Start educating yourself with some good books. Come up with a written investing plan. If you need help, hire an hourly or flat rate financial advisor to help you make one. Make sure your asset allocation is significantly less aggressive than it was in 2008. Most importantly, stop allowing fear and greed to dictate how you invest.
Some advocate for a dollar cost averaging approach. If that mental crutch helps you, then feel free to do that. But sooner or later, you'll be 100% invested anyway, and every day after that is exactly like you lump summed into your portfolio that day. So I would just lump sum your money into the market now, but do so in a less aggressive asset allocation. If you are nervous to lump sum into your asset allocation, it is too aggressive.
Remember that although a less aggressive approach is comforting, it might not reach your financial goals. You NEED to take at least some market risk. If you cannot do that with frequently revalued assets like publicly traded stocks, you should cultivate an interest in real estate, where the value of investments at least seems less volatile.
Remember the words of Phil Demuth in this respect:
Even if risk tolerance existed and could be measured accurately, why would it be an important factor to consult when considering how to invest? You should invest in the way that has the greatest prospect to fulfill your investment goals. That might mean taking more or less risk than you would prefer. If you are a sensitive soul who can brook no paper losses, the solution is to get a grip, not to invest “safely” if that locks in running out of money when you are old.
If you're one of those who sold out in 2008 and never got back in, I hope this post has been helpful to you.
What do you think? Did you sell in 2008? Know someone who did? What advice would you give them? Comment below!
It is interesting that he/she “hates financial advisors.” Boy, could they ever use one. Just think how much richer they would be if they followed good advice in 2008. We quibble about tiny fees, but behavior is the real enemy in cases like this and an advisor can help.
You’ll delete this, right WCI?
Yes, spam gets deleted, but not while I’m skiing.
Saying “I hate financial advisers” is like me saying “I hate doctors. Gee wiz. Like any profession, there are good professionals and not so good professionals but that doesn’t mean you throw the baby out with the bath water. Check your ego and emotion at the door and find a solid CFP, they are everywhere, just like docs. The value a solid CFP would have provided you significantly outweighs the cost, especially in your case. The White Coat Investor gave one numerical example of this but I can think of so many more like helping you with the best retirement plan for your situation, estate planning, saving money in the most tax efficient buckets, minimizing taxes, ensuring you and your family (if you have a family) are protected from unexpected catastrophic events, creating, executing and monitoring a plan for retirement, helping loved ones like parents and children with their concerns, saving you time so you can focus on other higher value activities in your life, peace of mind. Let me repeat that, peace of mind. Try putting a dollar figure on that one and let me know what it is!
I think a large part of the educational advice for this person doesn’t just involve teaching them that they are likely to experience a bear market, but to view the bear market as an opportunity to continue to buy stocks on sale.
Just as the market has a certain number of corrections one can expect to experienece over the next “x” number of years, it will also have multiple and continuing upward trends overall. So as the market dips, and you continue to invest… You are actually getting those stocks at a cheaper price that will eventually come back up.
In fact, for this reason in my early career I am actually hoping for a bear market over the next few years so that I can pound money into the market via low cost index funds and then watch them come up at a gradual rise (with the expected number of corrections) over the remainder of my career.
I’m not hoping for, but expecting, the same thing. I have some cash sitting around waiting for it.
If you’re saving that cash for investing at the right time, imagine how much more cash you’d have if you invested it over the last couple of years.
Agreed that you should just invest along the way consistently and not time the market. Fruitless endeavor
To be clear, it’s cash that is in the cash portion of our portfolio — in other words, I will always be keeping that amount of cash around. It’s just going to be put into the stock market when the market goes down and then the cash part of the portfolio will be filled back up, if that makes sense. We will have a temporary period of time with less than our usual cash reserves due to the investment. Our normal investments will continue apace.
Be careful what you ask for. I got 2008!
And how do you stand 10 years later after continually investing through that?
Well, a good example is REITs, which I added in 2007, just before it headed South. I lost 78% of that initial investment from peak to trough. My long term annualized return in that asset class is 11.2% per year. Stay the course.
Vanguard has one study where they track the performance of their index fund (11 percent) over a long period. Then, they track the performance that their investors actually received, and it was something on the order of 5 percent. It is because you bail out at the wrong time and get in at the wrong time. I see this scenario all the time in my financial practice. It might be helpful to use two factor authentication to log in. For example, at Schwab they will mail you a token. After you put in your password, you have to have the mobile token and enter the code. Vanguard has something similar but with a texted code in order to log in. This extra step makes it harder for you to log in when you are on the can. Perhaps ask Vanguard to do everything by paper so you CAN’T login. They asked Dan Ariely of Duke (professor of behavioral finance) what he did during the financial crisis. He logged in three times with the wrong password so that he could not log in any more (locked out of his account). Vanguard has two very good products that can combat a situation like this. One is their tax managed balance fund. I get a lot of people that will log in every day, and this fund is for a taxable account. It is half stocks, and half municipal bonds. When you log in you won’t see much fluctuation at all, but it will gradually go up over time. The Vanguard life strategy funds (60-40 mix) is similar and can be used for retirement accounts. Interestingly, in 2008, even these funds went down tremendously. However, for typical recession when the stocks go down say 15 percent (not 50 percent) the compulsive “loginer” will really not see things fluctuate too much. Lastly, Jim’s upcoming course would be perfect for someone like this. I would also highly suggest this reader take a look at “Stocks for the Long Run,” by Jeremy Siegel. He will show you that the real risk is not being in the stock market. You are guaranteed to lose your purchasing power over time due to inflation. The other thing this reader should do is google “Warren Buffett Index Funds.” He actually talks a lot about this concept and explains it better than anyone.
While it’s true that human nature causes us to make poor decisions and we sometimes need to be protected from ourselves, the studies that show investors underperform the funds they’re in by 4% to 7% have been debunked by both Wade Pfau of Retirement Research and David Blanchett of Morningstar. Neither of them could replicate DALBAR’s claims, which don’t make much intuitive sense.
They believe DALBAR is comparing lump sum investing to dollar cost averaging, which gives you most of the difference between the funds’ annual performance and the performance of the typical investor, who is not investing all of his or her money into the fund on January 1st. Of course, DALBAR refuses to show their methodology and stands by their claims. I’m guilty of having quoted the same flawed studies, but now I tend to believe Pfau and Blanchett.
Nonetheless, making it less easy to bail out and reading a good book or three are excellent recommendations.
Best,
-PoF
One other thing, read the chapter on market fluctuations in the “Intelligent Investor,” by Ben Graham. This master will tell you how to deal with market fluctuations. It is awesome.
Thanks for running this. A lot of the people I work with have expressed variations of this sentiment. Also I’m not sure about real estate being so “safe” for such individuals. The downturn in 2008 seemed to affect real estate prices for a lot longer than it took for stocks to turn around (but I’m not an expert on this).
Thanks for running this. A lot of the people I work with have expressed variations of this sentiment. Also I’m not sure about real estate being so “safe” for such individuals. The downturn in 2008 seemed to affect real estate prices for a lot longer than it took for stocks to turn around (but I’m not an expert on this).
Very good article. I agree that some people would benefit by having a financial advisor. I would also hazard a guess that the number of people in this group could be drastically reduced by simply reading one good investment book. I can’t bribe some of my family/friends to read a single book on the subject. I guess the intimidation factor is just too high. They have been told it is too complicated and best left to a professional. Then the typical professional sells them a whole life policy and a variable annuity while extracting 1% or more AUM fees every year while under-performing the indexes.
I appreciate WCI’s intent here. He is exactly right. But I had one experience that led me to believe some people can’t be helped! A family member asked me to help select a mutual fund in 2007. I recommended against it unless she would commit not to sell during the next downturn (and no, I did not predict when it would happen). She did, bought Vanguard Balanced Fund, then promptly sold pretty close to the market bottom. So, my advice to the WCI readers who have stayed out of this market. Listen to WCI. But do NOT buy into the stock market until you have educated yourself enough to internalize that the market downturns are actually good for your long term investment returns. Everything you need to reach that conclusion, with empirical evidence to prove the hypothesis, is right here. Or, over on Bogleheads, etc. but if you don’t believe it, you’ll still sell out when the paper losses look too big and turn them into real losses.
By the way, if you are struggling with getting back in the market, remember, most of us here have made some bonehead money moves. I have for sure. My sin is thinking I can time the market. I know I can’t, and take steps to prevent myself from actually doing it, but I want to. What did WCI call it? Oh yeah, greed. Anyway, there is time. Read the blog, read the books. Ask more questions. If you need an advisor, get one. Personally, I don’t think an advisor will help in this case, though, until you internalize the decision to remain committed to the long term path. Well, not unless you give up control of your funds, and I would never recommend that.
Until you experience a bear market you are a newbie in the investing world. We all think we are so smart until this happens. I have been through 2 bear markets without hibernation into cash. I keep trying to become less aggressive at 60 but these darn stocks keep appreciating! I think the doc mentioned in this post needs a financial advisor. Anybody that completely bails out during a crisis needs someone to talk to before they do it again. I sadly know people like this.
The terrible thing is that sometimes even having an advisor doesn’t help. I know docs who bailed in 2008 both against the advice of their advisor and WITH the advice of their advisor.
I agree. You can’t know how you’ll react in a bear market until you’ve been through a bear market.
Since I have only been investing for a few years and have never been through a bear market, I have made the intentional decision to back off on my asset allocation.
While my retirement accounts have around 90% stocks (I won’t be touching them for 3 decades), my taxable account (the vast majority of my assets, which I might be drawing from prior to age 65) has around 60% stocks.
If I can make it through the next bear market with a cool head, then I may increase the stock percentage in my taxable account.
I sometimes think I’m getting to be pretty knowledgeable about this finance stuff, then remind myself that I haven’t been through a bear market yet. I know I’m supposed to not sell in a downturn and I hope I won’t, but I guess I can’t say for sure until I’ve actually been through it. However I’m sure when that time comes I’ll keep reading WCI and there will be lots of encouragement not to sell!
Undoubtedly. Just like there was in our last bear market in 2011 that most people don’t even recall. Here’s the blog post I published at the time. It didn’t get a single comment (most likely because hardly anyone was reading at the time as it was only 3 months after the blog started.)
https://www.whitecoatinvestor.com/stay-the-course/
I have a partner who has an inordinate amount of cash and every now and then reminds me he’s “waiting for the right time” to get back in the market. I have tried to gently encourage him that theres no right time, etc…but I dont think hes changed at all.
I dont know what you can do about bear markets outside of trying not to pay attention. With social media, tv, etc…it ramps up the perceived intensity of the situation and the next one is going to seem like the depression on steroids because of it. Best to just avoid any such contact with that and try to remind ourselves its totally normal, does and will continue to periodically happen.
I like Hattons method of just not looking during these times.
Thanks Zaphod. In 2008 I let the statements pile up unopened (still receiving paper in those days) for a few months. Finally opened them up and did some tax loss harvesting in a big way and bought some Apple. In 2000 I had too many individual stocks to do the Ostrich routine.
I too was an ostrich in 2008, I knew i had lost bigtime in my 401k, but saw no value in seeing “how” bad. I left about a year’s worth of statements on the dresser. When I finally got over that sick feeling, I rebalanced, and, increased my 401k contributions. I was about 75% equity, 25% bonds in 2009. I kept that going until I retired, in 2015. Since then I have been changing my allocations, as the market has risen. I am currently at 25% equity, 75% bonds & cash. I am no longer putting in, being retired, I am taking out. Yes, I want it to last, but, I also want to sleep at night, and the prospect of a looming correction would inhibit my retirement if I was still so deep in equity. It is absolutely fear vs. greed. I would love to see more growth like the current bull market, But I know there will be a correction, just not when. I can live another 30 years on my holdings, so that’s fine. If a correction comes, I will rebalance, if not, I’ll be fine just the same, thank you.
This seems like a good situation for something like a Lifestrategy fund that rebalances on its own, assuming that with enough education the person is able to leave the fund alone during the next bear market. With this past behavior on display, counting on oneself to rebalance manually into stocks when they’re taking a nosedive seems like a really bad idea.
Easy answer for the risk averse: buy a TIAA Universal Life policy currently paying 3.85%, guaranteeing 3%, with no agents’ commissions. There are two deductions only from the premium: the state premium tax, typically 2% but, e.g., 0.7% in NYS, and cost of insurance (COI) charges at competitive term rates. In best health, age 40 male in 2% state, for $1,000 monthly premiums and a $500,000 initial death benefit, end-of-first year cash surrender value in NYS is $11,674. COI charge for year, $589. TIAA (tiaa.org) is top-rated financially.
I love it. Let’s take someone who doesn’t want to potentially lose money in the stock market and guarantee a loss with a universal life policy.
Just to be clear (and I know you know this), the 3.85% is the dividend rate, which is not exactly the same as the return. As you can tell, the first year’s returns is negative (although much better than most cash value policies.) The longer the policy is held, the closer the actual return gets to the dividend rate.
I know that we do not time markets. But is there any logic to following course of action as a new attending. We are going to max out all available retirement options (403, 457, HSA, backdoor Roths). What we do with the “extra” money on top of expenses. We can do taxable account, wipe out student loan debt and start saving cash for down payment on next home. In reality we are probably going to do a combo of these. However, is there any sound logic in keep a little more liquid assets handy for when the eventual correct comes and we can use the liquid cash to buy up stocks in a taxable account while the market is on its way down?
If you have never invested in individual stocks before I would not try to learn how to do it in a wicked Bear market.
Sorry I did not mean individual stocks. Meant muual funds or etf like S&P500 in a bear market. I will never do individual stocks
Sticking to an asset allocation strategy does precisely what you want to do if you rebalance faithfully and regularly. It forces you to buy low and sell high over the long term.
To answer your question, no, there’s no rational logic to it. It essentially means that you plan to invest that money but are waiting for the right time. You’ll never know the right time prospectively. There was a forum thread from someone about a year and a half ago worried about the market being at all-time highs right before the election, and they thought we were at the top of a long bull market and would go down after the election. What happened since? About 20%+ gains. So now what should they do? Invest it now? Well, if they waited before, shouldn’t they wait now? Then what if the markets go up another 20% this year?
I think that I did not articulate this well (as per usual). I plan on saving $100k for a downpayment for a home. Since I will have liquid assets, if there is a correction (i.e. market drops 10% in that time) then use that money to put a portion of that money into a taxable account while it is “low”. We do not need a new home in any specific timeline, so we have flexibility there.
Regardless, I don’t know enough to get cute. I am just going to stick with asset allocation as you suggested and not get cute.
Why would you keep liquid assets handy while carrying student loans at 4-8%? Just pay off the loans if you think the market is overvalued, then when/if it crashes, redirect savings toward the market if you think it is undervalued. It’s not like paying off loans or saving up a downpayment is a bad thing.
For a neurologist I do not use my brain… or my words… very effectively on this site. Sincerest apologies sir.
Let me attempt to clarify:
I would NOT carry that large of liquid assets with the student loan still hanging around. This is all after maximizing 403b, 457, HSA, backdoor Roths.
Scenario #1: I think my use of the phrase “probably going to do a combo of these” made that unclear.
Step #1: Get liquid emergency fund up to $30k (which with our expenses is overfunded)
Step #2: Pay minimum monthly payment on variable 5 year
Step #3: Invest all the extra money in taxable account (equities mostly) instead of early paydown (merits of this approach being debated https://www.whitecoatinvestor.com/forums/topic/math-help-re-recent-blog-post-loan-payoff-vs-invest/ )
Scenario #2: What we are actually going to do! (Wife has spoken 🙂 )
Step #1: Get liquid emergency fund in Ally Savings to $30k
Step #2: Lump Sum payoff Student Loans in June 2018
Step #3: Place 50% of extra money in taxable equities (index funds) whilst placing the other 50% in money market and/or CD account to save for house downpayment
Scenario #3: The pseudo Timing Approach I suggested
Step #1: Get liquid emergency fund in Ally to $30k
Step #2: Lump Sum Payoff Student loans in June 2018
Step #3: Place 25% of extra money into taxable equities whilst placing the other 75% in money market or CD account to save for house down payment
Step #3a: If there is a downturn (defined as >10%) then use the liquidated funds to rebalance the approach to 50-75% taxable (equities) account and 25-50% liquid funds in an attempt to “buy low”
** As I type this out I realize this is trying to time the market and hence getting “too cute” for my own good. I do not even know 101 investing I don’t know why I open my mouth and suggest these things **
Most important thing when young is your savings rate, so that when you’re older the returns actually matter. Just keep plugging away, it’ll pay off in the end.
As you continue to invest, you’ll learn that time in the market matters more than timing the market.
Well said.
Vanguard has a recent study that indicates lump sum investing over the long term is more effective than dollar cost averaging – https://personal.vanguard.com/pdf/ISGDCA.pdf. It’s an interesting read – i’m early in my career, I was still in school during the last bear market. I’d previously seen dollar cost averaging as a way to mitigate risk. Reconsidering that now. (To be fair, most of my investments are DCA simply due to I invest as I am paid.)
I think what is being talked about is that if you have a lump sum say from a bonus or an inheritance it is better to go ahead and invest it as a lump sum rather say monthly until it is gone. DCA is a wonderful way to accumulate significant assets over time from your paycheck.
There is a difference between “periodic investing” and “dollar cost averaging.” Most of us “periodically invest” because that’s how we’re paid. You can’t dollar cost average unless lump sum is an option. If you don’t have a lump sum, you can neither lump sum it nor DCA it.
I DCA for years into several mutual funds. I periodically invest now thru Vanguard.
I’ve shared this on Facebook, noting that it is one of the finest articles on long term investment I’ve ever read. I’m by no means an investment guru, but I have three times saved friends and relatives a lot of money by acting as an anchor of sanity in the midst of a deep market drop. In another instance a relative jokingly said to me “What does Warren Buffett know?” when I used a Buffett quote while suggesting that suddenly investing 10% or so of his assets in five tech stocks and another 10% in a NASDAQ fund during the blowout phase of the tech stock frenzy might not be a good idea.
Thank you for sharing.
Time for the rail. Most of the readers here can do fine without an advisor. However, I believe that most individuals would benefit from hiring an advisor; clearly the subject individual would have benefited from an advisor. Vanguard has attempted to determine the relative value of the various services provided by an advisor. They conclude that the most valuable (50% of total) is behavioral coaching.
Client tells the advisor in 2008 that he wants to bail. Advisor says don’t do it. Client insists. Advisor insists, and manages to talk him out of bailing. Total time involved in the exchange is one hour. You state that hiring a financial advisor would be well worth the fee. Sure, but are you suggesting that the client with $3M AUM should be paying a $30,000 fee for that hour, or even half the fee, $15,000? Hiring a financial advisor is a good idea in many cases, paying the absurd %AUM fees is not.
Maybe just stating the obvious, but the actual cost of the one hour of advice in my example is 300,000/150,000+. The annual %AUM fee has been paid for 10 years following 2008, with no additional behavioral don’t-bail advice required.
When Trump got elected 2 colleagues of mine feared the market would tank so they pulled out of the market. Boy did they miss on one of the best bull runs ever. Lesson is, do not time the market. Just don’t.
I’ve run in to quite a few who had the same fear and response. Not like 2008 though.
I dont get the logic with that. Loves debt, hates taxes and regulations, and how do we say…not likely to be tough on shady business practices, etc…plus, economy was doing well and no president is going to over ride a great economy.
I agree. Surprised me too. But it was (and still is by many) viewed as a doomsday scenario. Politics aside, the point is you shouldn’t invest by looking at the news of the day, whatever that news may be.
Keep your investing apolitical. I think it is ok to occasionally invest on short term hysteria (brexit).
I had just completed a rollover from LPL financial into my Fidelity rollover IRA account when the Brexit vote hit the news. As such, I happened to have an extra 150K to invest in the market on post-Brexit day #2. Better to be lucky than good…
I’m not a fan of Trump and was worried the market was going to tank primarily because of the incredible uncertainty he would introduce with a half-baked approach to everything.
However I never had a plan to pull out of the market; at the time I was wishing that if the market tanked I had cash laying around that I could use to buy low, but since I don’t keep cash laying around for that purpose (it’s either invested or designated for something else), it wasn’t an option anyway.
Turns out the market dropped for like 6 hours and I’ve ridden the 20% increase along w/everyone else. Doesn’t change my opinion of the election outcome, but I’m allowed to take the good with the bad also.
Great job running this post as this kind of situation is someone we can genuinely make a difference for.
This investor is not even halfway through his or her investing career and as such the key is to wipe the slate clean and fix the behavior. I started investing with my grandpa in 1998 and bought three dot com stocks that were can’t miss. They lost most of their value. none of us out there are without mistakes. In addition to what Jim suggests above, I have found a few tips to staying the course:
1. Viewing red on the stock ticker as a sign that means “for sale!!”(thanks ben graham)
2. Putting all of the “can’t miss” hot stocks or funds in a fake watch list where I pretend I bought them and then see how I would have done. Three quarters of the stuff in there tanks. This cured me permanently of all temptations to buy that “next hot stock”
3. Tracking progress – net worth, investments, budgeting. This is motivating in so many ways especially with debt reduction. It also showed me that my past performance selecting individual stocks has underperformed index funds.
Thanks again Jim and nice job. And to the investor out there keep plugging away – you can do this!
From 2002-2010, one of my job responsibilities was to serve on the 401(k) investment committee for the manufacturing company that i was the Director of Financial Planning for. I had a front row seat for all of the drama of a bull market and the subsequent market collapse. In the 401(k) plan, there were about fifteen fund options from your standard Vanguard index Funds, equity and bond mutual funds, but the most popular fund was … the stable value fund. About 40% of the assets were in the Stable Value Fund in 2002 as the country was coming out of the dot-com fiasco. By 20077, much of that was reinvested into equity funds with all of the press talking about the hot market.
In 2008, a good number of our employees went back into the stable value fund AFTER the market collapsed and remained there well into 2013 when I retired. Those people were constantly complaining that their 401(k)s never recovered from the crash. Mine had increased substantially as I stayed the course. I will admit that for a few months, I quit reading the Wall Street Journal and banned CNBC from the television. Yes, I did adopt the “ostrich” approach of ignoring the market news as much as humanly possible.
What I found most disappointing in the whole experience is how many people stopped contributing to the 401(k) when the market was low. There were many weeks in 2008-2010 where there was more money coming into the 401(k) plan to repay 401(k) loans than in actual contributions. It was equally depressing that my contribution weekly represented about 10% of the finds going in each week … and I was one of 400+ employees.
I do not have anything to offer the individual asking the question other than there was a lot of missed opportunities. Hopefully, the individual has another 20-30 years to recover or is able to “earn” himself out of the dilemma. Time and money can rectify the situation.
Personally, I always been risk adverse. When most people told me that I should be 100% in the stock market when I was younger Instead, I was invested in three Vanguard funds – Windsor II, Wellington, and the GNMA fund. This meant that I was 70% stocks/30% bonds as an allocation with a strong bias to value investing. I missed the tremendous run up related to the dot.coms but I also did not tank as bad as others. Ditto in 2008.
One other thought on hiring a financial advisor. I think they can be really helpful in getting two people in a marriage on the same page with longterm financial planning and advice. I prefer a DIY investment approach (or at least roboadvisor), but finally hired an advisor to get my soon-to-be husband talking about disability insurance, life insurance, investments, budgets, debt repayment (we’re both fairly high earners, though he’s slightly ahead). Before the advisor, the best I was able to do was get him to get his hospital’s match in his 403(b).
Excellent point.
All of us have done something financially that we regret.
When I got out of residency (1994) and started investing, I had no idea what I was doing. I invested in a gold mine in Cuba (lost everything), a blood product company called Biopure, which used cow heme for transfusions used in veterinary medicine but was suppose to go into the human market. It didn’t. I lost essentially all my money on that one too. My wife was convinced that the stock market was a place to go to lose all your money (at least in her husbands hands!). I stayed out of the market except for my retirement funds which were overseen by an advisor up to about 14 years ago. I then educated myself with most of the books described in the post. It was disheartening to learn of my lost opportunities. I was upset over the expense ratios I was paying for the funds my advisor had me invested in. I dumped the advisor and invested in index funds. I have become a big advocate for WCI and am sure to talk to all the new partners we have coming in to make sure they educate themselves financially. My daughter is a second year med student and I had her read WCI’s book over the holidays. I have encouraged her to educate her classmates to check out WCI’s site as well. Knowledge is power. This investing thing is too easy for doctors to be losing money doing it.
It is important to make sure you also have enough liquidity in a stable vehicle such as savings or money market for a very healthy emergency fund. Many people hate having cash sitting around burning a hole in their pocket earning a measly 1%, but if there is a repeat of 2008, or even if it’s just a market correction, it could take longer to sell a house or find another job if needed/desired.
I lived in NY during the 2008 crash, and although I didn’t pull out of the market and I rebounded well, I saw many people foreclose on homes, lose jobs and go into large amounts of debt. Consumer debt is at all-time highs again, and I don’t think we have hit the peak of the market, but I won’t go all in. I also have about 100k that may be needed for a downpayment if we move and can’t sell the current house quickly.
If you are planning on using money for a downpayment on a home somewhere in the next 3 years, I personally would not invest that money you will use for a downpayment in equities right now. Invest money that you can afford to lose or take a big hit on. I’m at about 70/30 allocation as well.
Agree 1000% that the real issue underlying this behavior is fear and greed. People, even highly intelligent people, have a hard time judging risk dispassionately. It takes a lot of mental effort to stick to a plan when your gut is begging you to do the opposite.
What can be and should be done with 2 million in cash to invest this year should it be over 2 or 4 years in stocks, I am still working. Thanks
If you have 2 million in cash and don’t know what to do I would probably find an advisor from the WCI recommendation tab.
I think the argument would generally be to deploy this money as a lump sum now. If you decide to invest it over a year or two I don’t think it will matter as you’re already starting with 2 million.
If you have accumulated $2 Million in cash and have not deployed any into the stock market you should definitely contact at least three of the advisors from the recommended list and discuss your situation in general terms before selecting one to advise you. You should also read up on investing before making a decision among those three advisors, or on another if none of them inspires confidence. Finally, despite the fact that investing all the money immediately at a preferred allocation strategy is the way to optimize results in a statistical sense you should think long and hard about your risk tolerance before doing that. In that respect you have made an excellent start by reading this WCI article. You should reread it a couple of times and fully internalize its message before doing anything.
I can’t tell what you’re asking.
Should have “invested” in whole life insurance, type that maximizes cash return. It is a unique product.
Uniquely great commissions for the folks selling it; uniquely terrible returns for the investor.