When to invest in index funds?
July 16, 2014 3:08 AM   Subscribe

I want to start investing in index funds, but most that I look at have gone up in value quite a lot over the last two years. Would it be smarter to wait for a drop before investing, or just go in now?

I'll be looking at this as a minimum 10 year investment, so even if I invest now and the market drops, there'll be time for it to grow again. But if it drops, wouldn't it have been smarter to wait until it was low before I bought into it?

Then again, the whole reason I'm interested in index funds is because I am aware how little I know about it all, and therefore am unqualified to make predictions about whether the market will go up or down at any one point.

I've been reading a bit at the boglehead forums, and that approach seems very sensible, but I'm curious to know if it may be clever to delay investing in some scenarios.

I'm based in Australia, looking into the Australian stock market, in the order of 50,000 AUD.
posted by A Very Muddled Alpaca to Work & Money (14 answers total) 4 users marked this as a favorite
if it drops, wouldn't it have been smarter to wait until it was low before I bought into it?
Yes, but you don't know whether it'll drop or not. Waiting to invest has the same effect as betting that the market will go down.
posted by katrielalex at 3:31 AM on July 16, 2014 [8 favorites]

Splitting your investment up into pieces and investing a bit each month (Dollar cost averaging) is one way to lessen the impact of a sudden market drop.
posted by panic at 4:07 AM on July 16, 2014 [3 favorites]

Don't try to time the market.

That said, you've got enough on hand that you can make worthwhile-sized diversified investments. There's no good reason to restrict yourself to the AUS indices.

Think about it this way : you already have a huge amount of exposure to the Australian economy through your job, house, etc. If you invest in non AUS indices, you've hedged that exposure to some extent.
posted by PMdixon at 4:08 AM on July 16, 2014 [4 favorites]

I wanted to put some money into VTSMX back in 2013, but didn't have enough ready cash to make Vanguard's $10K minimum. I talked to my dad about using some money that's technically mine but sitting in a savings account he has joint access to (earning like half a fart of interest of course).

He said no, that he thought it was a bad idea, that the market was unnaturally high and heading for a crash any minute now, and to just wait. So I didn't do anything. It's gone up $10 a share since then.

He's actually in town right now and apologized last night while we were at dinner for fucking that one up.

Long story short, don't try to time the market.
posted by phunniemee at 4:42 AM on July 16, 2014 [1 favorite]

If it were me, not knowing about any investment minimums or such, I would put half in now, and do a third of the remains half every 3 or 4 months so that you are fully invested in a years time.
posted by 724A at 5:37 AM on July 16, 2014

I asked a similar question a few months ago. As for timing I was going to investing then in any case, but the answer about dividing up the investment over time was that's never a good strategy. It may be a good idea for you to diversify your total investment, but you should invest the entire amount at once.
posted by sevenless at 6:37 AM on July 16, 2014

I'll be looking at this as a minimum 10 year investment, so even if I invest now and the market drops, there'll be time for it to grow again. But if it drops, wouldn't it have been smarter to wait until it was low before I bought into it?

The problem is that even if there is a drop, you won't really know when the bottom happens until well after the fact. It is true that the market overall tends to go up steadily for relatively long periods of time and then drop more steeply for a shorter period of time, but historically if you invest during a long period of time you will gain more than you lose. If you invest right before a significant drop (say, 10% in a month) you would in hindsight have been better off waiting, but investing right before a drop is not particularly likely and you have no way of telling the difference between the time right before a drop and any other time. If we were having this discussion in late 2012 and you decided to wait until after the next big drop to invest, you would still be waiting and would have missed out on around 30% gains.

The point is that if you think that the market will over time gain more money than it loses (which if you don't, you shouldn't be investing in it) and that you can't predict specific movements of the market (you can't), the best strategy is to put as much money into the market as early as you can, because the longer it's invested the higher your expected return will be. There are other things to worry about like diversification and variance in your overall finances, but if you are just talking about a 10 year investment in the market with an index fund that you've already set aside, you are only ever going to reduce your expected return by letting the money sit in cash where at best it retains its value for some indeterminate amount of time before you invest.
posted by burnmp3s at 6:52 AM on July 16, 2014 [2 favorites]

If you are going to invest with future earnings, say a set amount from each paycheck, then dollar cost averaging is great. If you have a pile of cash it is probably better to go all in right now. If you are a bogglehead type I am pretty sure that this is what they recommend. Money sitting in cash is doing nothing for you. Even if the stocks go down they will come back up over your time horizon and they could just go up and then you pay more. Also, by waiting you miss out on the dividends. Rather than putting all into one index I would probably diversify in a few low cost funds with an emphasis on the S&P500 index, but I am somewhat conservative.
posted by caddis at 6:52 AM on July 16, 2014

You are investing in index funds not because you are not knowledgeable about the market but rather because you are smart enough to know that nobody, even so-called professionals and experts, can consistently and reliably outguess the market. Likewise, you cannot time the market. It's a controversial topic, but there are studies that show that, on average, investing earlier provides a better return on investment than dollar cost averaging (i.e., investing partially later). "On average" doesn't mean that you will have a better result, but since you can't possibly know that in advance, so you should do whatever you feel comfortable with. Frankly the main benefit of dollar cost averaging for most people is going to be the investing discipline it instills, particular for people who set up automatic periodic contributions.
posted by Dansaman at 8:05 AM on July 16, 2014 [2 favorites]

I don't think stock prices are literally a random walk, but it makes sense for unsophisticated investors like me (and, I assume, you) to behave as though they are.

So, in practical terms: the fact that the market has been going up for a while tells you nothing about whether it will go up or down tomorrow, the next day, etc. Just ignore it, put your money in, and don't think about it.

As other posters have noted, this is sort of the whole reason to be in index funds -- trying to pick stocks is a fool's errand, so you just ignore the problem altogether.

So yeah just do it.

On a personal note, anxiety about whether now is the perfect time to invest has cost me a lot of money. Of course it could have saved me a lot of money if things happened differently. But average long-run returns in stocks are ~7%, so you pretty much want to be in there.
posted by grobstein at 8:24 AM on July 16, 2014

(And recent returns on stocks are way more than 7%, but it's hard to know what to think about that.)
posted by grobstein at 8:25 AM on July 16, 2014

It's not timing the market, it's time in the market.
posted by caek at 10:23 AM on July 16, 2014

Here's an article from Vanguard you may be interested in about dollar-cost averaging vs. lump-sum investing: "Dollar-cost averaging just means taking risk later"
posted by jabes at 10:48 AM on July 16, 2014

Generally speaking, I don't try to time the markets. Which is to say, if it's a good investment, it doesn't really matter when you buy in. You either want it in your portfolio or you don't.

That said, given market volatility, I do keep a 15% cash balance so that, when the market dips, I can jump in with a new investment. This is by no means foolproof, but it's worked pretty well for me in terms of investing new capital.

I should add that I'm losing interest in following individual companies. It's too much work. So I am gradually moving to index funds, where timing is less of a factor.
posted by Short Attention Sp at 6:46 PM on July 16, 2014

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