Should I dump money into my retirement index fund if the market craters?
October 13, 2013 11:38 AM   Subscribe

I have a bunch of money I've been wanting to dump into a low-fee index fund all year. (It's my retirement account.) I've been holding off because of the whole budget/debt ceiling business that's been going on all year. It looks like events will be coming to a head this week. If the market totally craters, would that be a good time to buy?

I know, I know, efficient markets, blah blah blah blah blah. But the conventional wisdom is that, if you're investing for the long term, it doesn't really matter when you buy. That said, it would seem prudent to take advantage of a dip in the market.

The only way I could see this going wrong is if the debt ceiling thing turns out to be such a big deal that the market permanently craters and never comes back up, or if the dynamics of the market change so drastically that the old rules -- such as the relative safety of index funds in the long term -- no longer apply.

And yes, the index fund is for retirement, so the money should be sitting there for at least the next 30 years.
posted by evil otto to Work & Money (16 answers total) 4 users marked this as a favorite
 
In theory, yes, it is better to "buy low". But unless you're psychic, you have no way of knowing when things will be low and when they'll be high, and it's the long-term nature of your index fund investment that will truly provide the growth you need, so the true best day to invest for retirement is always yesterday.
posted by ThePinkSuperhero at 11:59 AM on October 13, 2013


How will you know when the market has hit the bottom? When you invest this probably isn't going to matter much if you do all the other things you're supposed to do: have an appropriate asset allocation, keep your fees low, stick to index funds, rebalance, etc. Like you said, you're keeping these funds in for decades.

Also: how long have you been sitting on the sidelines with this money and how much have you missed out so far by doing so? The market will either crash soon or it won't. If it doesn't, and surges instead, you'll just miss out on more gains.
posted by MoonOrb at 12:02 PM on October 13, 2013 [1 favorite]


How much is a bunch? 1k, 10k, 100k, or 1M? Anyways, I say go with your gut. This is one of those things that you have to experience personally. If it works, you will feel smart and interested in investment planning, if it doesn't, you will spend some time thinking about strategy and your priorities.

More seriously, if you have funds to disburse and yourself realize that it is impossible to time the market, why don't you draw up a plan to automatically buy in to the funds you want over a reasonable amount of time. I'm pretty sure this is win-win-win.
posted by tintexas at 12:16 PM on October 13, 2013


But the conventional wisdom is that, if you're investing for the long term, it doesn't really matter when you buy.

I don't know that this is conventional wisdom, unless you're talking about making regular, fixed amount investments over time. If you made a big one time investment and overpaid by 2x, or underpaid by 1/2, it sure would affect your long term outcome.

What you are describing, in your original question, is related to 'value investing,' which I think is an excellent long term strategy, but it requires that you first determine an inherent value in the asset, along with a lot of confidence that the value is enduring and predictable.
posted by zippy at 12:33 PM on October 13, 2013 [2 favorites]


Let's suppose that in the next year there is a 15% chance of the market decreasing by 20% in due to the shutdown, and an 85% chance that it will go up 10% in the next year with no lasting shutdown. Given these numbers, the market then has a 5.5% expected return, which is in the neighborhood of the historical average. Let's further suppose that in the year after a shutdown-related crash, the market will gain 24%, while in a normal year, the market will gain 5% for sure.

Now, my numbers may be wrong, but some numbers are indeed priced into the market, and priced in by people with a whole lot more at stake than I do. So we may as well assume my numbers are correct.

Given this, the reason to delay investing is to increase the risk of your portfolio; in the (likely) event the shutdown has no lasting effect, you lose a modest amount of money (the foregone return you missed out on), in the (unlikely) even there are lasting effects, you will win a lot of money by investing in a trough and making a 25% return the following year.

Delaying investing is similar, then, to placing a roulette bet, although the odds may be relatively more in your favor. That's not to say that a delay would be inappropriate, just that you should be clear that the reason to do so is to gamble on the market `cratering' due to the shutdown. If your personal information is that the market is currently underestimating the probability of a lasting shutdown, then you should delay.
posted by deadweightloss at 12:37 PM on October 13, 2013


The term you're looking for is "catching a falling knife".
posted by Benjy at 1:25 PM on October 13, 2013 [1 favorite]


Well, if you have been sitting on the sidelines all year, you've missed out on an epic 18% bump in the S&P 500 this year (discounting dividends). So even if you are right and the market drops 15%, you are still going to be more than 3% below where you would have been if you just bought in. Furthermore, if we really do default on debts, it is also possible that the market goes into a slow catastrophic tailspin as soon as you buy in.

However, having said that, you are where you are now. Given that, I'd say that buying on the dip is a somewhat reasonable plan now. The problem you face is that it could be difficult to time. They might work out some kind of whacky deal and the market surges in just a few minutes -- this is the essential peril of the market timer. Also, realize that the market has already priced in a risk premium anticipating the chance that no deal is reached. If a deal is reached the day before the deadline you have a substantial chance that instead of buying low the next day, you might see the market surge as the deal is inked the day before you buy in. If you want to roll the dice, wait for Congress to self-destruct and buy in probably the second day afterwards when things start to show signs of life. You could be on the right side of an epic Black Friday type meltdown that you can brag to your grandkids about.
posted by Lame_username at 2:07 PM on October 13, 2013


Where is the money now? If you have to sell some other asset to catch your big investment break, I doubt it will be worth it. If you can sell something now, wait for the crash, and then buy something else cheap- well, sure you can make lots of money. But everyone else will be trying to do the same thing. Market timing rarely works out when you are part of the crowd. If you want to time the market, look for something that the crowd hasn't thought of.
posted by gjc at 3:17 PM on October 13, 2013


You face significant headline risk by choosing to invest now, and I would suggest you not to try playing events as a retail investor. You ask if you should buy stocks if the "market totally craters", but the market cratering in fear of a US default, and market cratering if the US actually defaults on its debt, are two different scenarios with very different ramifications.

In the first, you are betting on buying the dip and profiting from a last-minute deal, the risk being that there is no deal, we default, and the market implodes.

In the second, the US has defaulted, and nobody knows exactly what would happen, but it would be nasty. People would dump stocks, because that is the first thing they reach for. In that case you're looking at a 2008-style selloff. Of course you can look at a chart of the S&P and say "wow if I had bought stocks in March 2009 I'd be rich", but remember that in a 2008 style crash you could lose a lot of money repeatedly calling the bottom too early, and there is no guarantee things would play out exactly like last time, especially with a game-changing event like the US defaulting.

My opinion? The risk of a default is very low, but not low enough for you to be risking your retirement money in exchange for the few % you'd gain by buying the dip. Wait for a deal to come out, then invest your money.
posted by pravit at 3:47 PM on October 13, 2013


What you're talking about is a classic stock-trader maneuver, for people who have brokers on speed-dial. It's harder to do this with index funds. I buy my index-fund IRA through Vanguard, but there's a definite delay (1-day or so) after I click "buy" on the website. That makes it harder to predict and time stuff like you're talking about.
posted by aimedwander at 3:57 PM on October 13, 2013


My opinion, which is just my opinion and nothing else, is that market timing is for chumps. If you can afford to have a chunk of your monthly income autodeposited into a big index fund, start that up right now, and just let it run. Think about it, at most, once a year.
posted by escabeche at 4:19 PM on October 13, 2013 [1 favorite]


I'm with pravit.

My only addition is that if you think the default is a real possibility, you need to buy precious metals NOW before they skyrocket at the default rather than investing in an index fund at the dip after. In a world where the dollar is still the chief reserve currency, if the US defaults, you can't be sure the dollar will survive with any worth useful for multinationals trading in the world markets.
posted by Fukiyama at 4:50 PM on October 13, 2013 [1 favorite]


Maybe there won't be a dip. Maybe there will be a last minute deal and the market will skyrocket and you'll miss out. You just never know.
posted by Dansaman at 9:06 PM on October 13, 2013


You've already made the important decision: you want to invest this cash in your retirement account. Good for you! Do that. Don't get so hung up on the timing. This debt ceiling business is entirely unpredictable and insane, I wouldn't try to time it in either direction. (OTOH if you believe the US economy will be permanently damaged by this current congressional crisis, then you may want to hold off a few weeks...)

One way to invest a lump sum without stressing about timing is Dollar Cost Averaging. Basically instead of investing $10,000 all at once, you invest $1000 once a day for 10 days. Or whatever time frame makes sense for you. It smooths out the highs and lows.
posted by Nelson at 12:48 AM on October 14, 2013 [1 favorite]


There's multiple kinds of market cratering to consider:

1. there was an event that was a known risk, and the markets overreacted, ie government shutdown
2. there is private market event nobody fully understands, or has complete enough information about, ie subprime collapse
3. there is an event nobody saw coming, and happens for no good reason, ie the 2010 Flash Crash

In case 2, investing is a rather large risk. Bank's own voodoo accounting systems make it such that essentially nobody knew how bad the balance sheets were. Banks argued they were illiquid, everyone else figured they could liquidate but not at prices that left them not bankrupt. Markets didn't really being recovering until six months later. And with substantial government intervention. If you're trying to learn investing lessons from that event, I recommend not overweighting that particular experience.

In case 3, you won't likely have a chance at it, if prices diverge with no changes in the fundamentals, someone will generally step in to profit. It's unlikely but possible a market crash could occur concurrent with a default, so I mention it here.

So with that preamble out of the way, on to what your question is really about: case 1. If congress cannot agree to service its debt, and the market craters, it could be an overreaction. Unlike the more typical sovereign debt default, the US is in no danger of being unable to service its debt. We have a solid economy and tax base from which to raise revenue, and lenders plenty willing to help us to roll the debt over. If the US misses a payment, we can easily make lenders whole once the political battle is over, with commensurate interest.

What makes your question hard to answer is, traders know all this. The VIX suggests that we're nowhere near 2008 levels of future uncertainty, and is declining.

Anyways, I fundamentally disagree with the premise that the US will default on its debt. It's a bargaining tactic, nothing more.
posted by pwnguin at 12:59 AM on October 14, 2013


This may not be sound investment advice but I'm just going to throw this out there. The default way to "time a bottom" is buy when things start to rebound.

You won't hit the "exact" bottom but you'll get cheap prices as they recover.
posted by bitdamaged at 4:02 PM on October 14, 2013 [1 favorite]


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