How does one ride the stock market
October 11, 2018 4:11 AM   Subscribe

I finally made an executive decision to be an adult and move a large chunk of money I've saved over the years into a taxable investment portfolio (moderate risk, ETFs and bonds). Bad month to do that! I know it's impossible to "time the market" but what do normals do in this scenario?

I had over a year's worth of living expenses just parked in my savings account making whatever pathetic interest my bank offers and it was getting to the point where letting it sit there felt almost irresponsible in a way, like it was rotting.

So I decide, okay, time to be an adult and move a a decent chunk of it into something like a moderate Betterment portfolio (90 stocks/10 bonds), and maybe start spreading my monthly savings between my usual savings account and my Betterment account. I already have a 401k which I max my company match, so this is post-401k savings.

Well, fuck me for trying to be responsible with my money - I've already lost a few thousand dollars as the market is spiking down like crazy and predicted to get worse. Feels bad! No, I don't plan on panic-selling. But do I continue to contribute monthly like nothing is happening? Should I contribute *now* while the market is down? Contribute *more* because the market is down? Should I hold off from contributing entirely and let the market correct itself? Do I in fact panic-sell everything because this entire plan was really shitty to begin with!?

I know, you gotta be cool-headed and think long-term about this stuff but I just want to make sure I am covering my bases and doing what smart people do. Is there anything actionable that I should be doing or is it literally "sit and chill, conduct business as usual". I'm just frustrated because I used to have pretty much 100% of my non-401k assets shoved into my savings account for the past few years, and apparently this was a dumb thing to do. Now I've bought into the market and not feeling particularly smart either.
posted by windbox to Work & Money (30 answers total) 5 users marked this as a favorite
You've left out key information here, ie how long until retirement.

But do I continue to contribute monthly like nothing is happening? Should I contribute *now* while the market is down? Contribute *more* because the market is down?

You'll get more shares now, so this is "buy low, sell high" in action. Just continue to contribute monthly. You are in a marathon not a sprint and if you course correct for every fall, you'll get nowhere.
posted by DarlingBri at 4:20 AM on October 11, 2018 [2 favorites]

Generally the advice that would be provided is that you should put little bits of money in the market, consistently over time. That way you “dollar cost average,” with the money you put in when the market’s low making up, somewhat, for money that you put in when the market is high. That doesn’t really do much to help you feel better about the money in the market already, but assuming you do put more in over time, it might prevent feeling that way in the future.

The other bit of advice I’d have to offer? Assuming your time horizon is long (retirement, whatever), don’t even look. The value today, in that case, doesn’t matter.
posted by doomsey at 4:23 AM on October 11, 2018 [1 favorite]

Basically, the advice is sit and chill. There’s some thing I’d have to google to find showing that someone who put a bunch of money in an index fund the day before the 1929 crash would have ended up with a very nice rate of return by 20-30 years later.
posted by LizardBreath at 4:23 AM on October 11, 2018 [1 favorite]

Response by poster: I'm about 35 (or 40, or infinity) years from retirement and my time horizon is actually fairly short - my only goal, honestly, is to look at my personal finance portfolio in 5 or 10 years and know that I did significantly better than just shoving money into savings like a sucker. Short-sighted, I realize, but also I'm a millennial who works in a fairly precarious industry, so my mind is more on "hoarding money for emergencies/survival/inevitably getting laid off for good when I'm 46 and ending up like those guys in the movie Company Men" as opposed to "Maybe I will cushilly retire one day when I'm 67" which seems wildly unrealistic no matter how aggressively I save. I am willing to let retirement goals become a byproduct of responsible saving/investment should nothing in my life go too wrong, that said, I'm taking things 5-10 years at a time.

Bleak I realize, but that's my personal finance worldview at the moment if it helps shape anyone's advice.
posted by windbox at 4:47 AM on October 11, 2018 [1 favorite]

Do you max out your 401(k) contribution? Or just the amount that your company matches? Do the former.

Also, the whole purpose of the year of living expenses is to keep it liquid and intact. Keep it in a money market account or something you can access easily, and then forget about it. Then set additional money aside for investments.
posted by chesty_a_arthur at 5:10 AM on October 11, 2018 [1 favorite]

I know it's impossible to "time the market" but what do normals do in this scenario?

Normals panic and sell everything at the slightest hint of a bear market, which is exactly why "can't time the market" is the common wisdom.

But anybody abnormal enough to be able to resist doing that simply adjusts their expectations by extending the timeframe over which they're making investment decisions, and spreads their portfolio across a diverse range of investments entered into over a diverse range of times. 5 to 10 years is quite a short timeframe over which to be thinking about the stocks component of a portfolio; it has historically taken longer than that for the underlying growth rate to swamp the sub-decadal noise of Obamaboomas and Trumpslumps.

If you're following a buy-and-hold strategy, which is the least unreliable way to make money on stocks, the key is to buy into solid well-managed companies that will most likely still be around in twenty years. Focus more on the sustainability of your candidate companies' operations than the month-to-month variations in their stock price, take positions in at least twenty of them or pay a cut to some reputable fund manager or index fund to do that for you, and the half that do well will most likely end up making up for the half that don't.
posted by flabdablet at 5:11 AM on October 11, 2018 [1 favorite]

Just saw your update—the above advice about liquidity and low risk goes double if you’re trying to maintain a cushion in a precarious industry. Having a savings cushion isn’t for suckers. Saving additional money in cash savings might be, depending on your goals (sounds like your risk tolerance for that additional money could be very high.)
posted by chesty_a_arthur at 5:12 AM on October 11, 2018

Sounds like you’d be better off in lower risk mutual funds, or any number of less volatile options. You don’t seem to have much diversity of products, and that’s a fairly conventional cornerstone of sound investment.

Or better yet, start paying an expert a small fee to help guide you through determining what to do with your money and how to build a portfolio over time, given your goals, degree of risk aversion or tolerance, liquidity needs, time horizon, etc.

Seriously, it’s pretty cheap, and the best part is they essentially train you, so even if the fees seem too high, you can quit paying them and return to being your own portfolio manager again when you know a bit more about what you want and how to accomplish it.
posted by SaltySalticid at 5:18 AM on October 11, 2018

Unless you know these shares are about to tank, leave the investments where they are. You haven't lost money until you've liquidated the assets at a unit price below your original purchase price (less fees, natch). Start working on reestablishing your savings and turn your focus to that balance. Watch it steadily climb every time period! You're doing great! Maybe check on your investments on the first of the month, consult an expert, etc. but this is how it goes, sometimes the market tanks right after you invest, and so far it's always come back. If it doesn't come back this time then everybody's equally fucked.
posted by disconnect at 5:23 AM on October 11, 2018 [4 favorites]

Investing money like this is good for long term plans. Very, very bare minimum five years, but really ten years and up. Because the chances of losing money are greater over a short period - over the long term the markets tend to go up but, obviously, can spend some time down on the way.

If this is "just in case" money, for emergencies, it's better off in something boring that won't lose value (low interest rates vs inflation notwithstanding). Or, if this is enough money that if it's lost, say, 40% of its value when you need to access it immediately, then fair enough.

Also, you have 90% stocks and 10% bonds, which is pretty stock-heavy. It's the kind of balance you would have if you're young and investing for a fairly distant retirement, and/or are happy with a lot of risk, and/or have other investments and it's not the end of the world if this investment goes down a lot. More bonds will help smooth out the ups and downs, in theory.

Having said all that, if you're carrying on for the long term, what the others said - keep putting in your regular amounts, don't panic. Remove all your stocks apps, bookmarks, etc to reduce the temptation to check on the value every day. Just look once a month, or quarter, or year (easier said than done, I know.). You're in this for the long term.
posted by fabius at 5:27 AM on October 11, 2018

Response by poster: Just want to note that the money is in a "moderate" Betterment portfolio - 90% vangaurd total index stuff (world total, emerging markets, small cap, mid cap blah blah blah) and 10% bonds. Looks like it's split between 10 different products overall. Is this not diverse?

About 40% of my total net worth is in cash savings - can never tell if that is not enough/too much. It used to be something like 70-80% which felt like way too much.
posted by windbox at 5:28 AM on October 11, 2018

I am privileged enough to be in a position where this is possible, but I treat my investments as gone and keep my F-U money in cash.

In that context keeping cash money around is not irrational.
posted by doomsey at 5:29 AM on October 11, 2018 [1 favorite]

The Vanguard Total Index is plenty diverse. If your time frame is 30+ years don't even look at the value. Just keep contributing.
posted by COD at 5:31 AM on October 11, 2018 [1 favorite]

Adjust your expectations or your portfolio if you think this is the market "spiking down like crazy.". This is some very small and mild moves; the market is just barely off its record highs. Seriously, it's about 7% lower than the all-time high! It's barely moving, we had one volatile day.

In general, the advice is to stay the course and not panic. However, if the level of discomfort you are feeling now in these very normal markets is making you worry, you should consider how you would react if the market dropped by 50% like in 2008. If this experience has taught you that your risk tolerance is lower than necessary for your 90/10 portfolio, adjust it to ensure that you won't panic in a true bear market.

However, bear in mind the costs of being under-invested are huge.
posted by bsdfish at 5:32 AM on October 11, 2018 [5 favorites]

I sold a portion of my portfolio in 2010. I did it for $reasons (I got laid off, which turned into an unemployment period of exactly one day), but in the end it cost quite a bit. I occassionally have to remind myself not to do that again.
posted by doomsey at 5:35 AM on October 11, 2018

There’s some thing I’d have to google to find showing that someone who put a bunch of money in an index fund the day before the 1929 crash would have ended up with a very nice rate of return by 20-30 years later.

Maybe you're thinking of the World's Worst Market Timer?

OP, all I can add is that I'd suggest ensuring that you have a healthy amount in liquid savings (savings account, CDs, etc) particularly given your precarious line of work. Emergency funds are exactly for that sort of situation. Investing in stocks is best for the long haul (>10 years out). Keep in mind that it's a marathon, not a sprint- even if the markets are down today, you'll be better off in the long run.
posted by photo guy at 5:46 AM on October 11, 2018 [1 favorite]

Some simple but helpful perspective in the NYTimes today.
posted by pazazygeek at 5:50 AM on October 11, 2018

Good advice above. The rules are:

1/ Invest the same amount each month;

2/ Get a fee-only advisor; and preferably

3/ Do (2) before (1).
posted by JimN2TAW at 6:20 AM on October 11, 2018

I use the Vanguard Target Retirement funds as a reference for this sort of medium-term saving. For example, you want to be up in 5 to 10 years, so click "About 5" (Target 2025) or "About 10" (Target 2030). You can see that, for people who need to start drawing down in 5 to 10 years, Vanguard uses a mix of 60-70% stocks and 30-40% bonds, split between US and international.

(The bond part is intended to reduce the variability of likely returns over the next ten years, at the expense of reducing the typical return. Wanting to be up in 5 years means you want less variability, hence more bonds.)

Once I know what Vanguard recommends for 5-year saving, then I can find a (low-fee!) fund to match. For example, this fund is a perpetual equivalent of the current retire-in-five-years fund. I set myself up to automatically buy a chunk of that every month, and I feel satisfied that I'm doing a reasonably conservative thing with my medium-term savings, regardless of what happens in any given month.
posted by john hadron collider at 7:16 AM on October 11, 2018 [1 favorite]

No, I don't plan on panic-selling. But do I continue to contribute monthly like nothing is happening? Should I contribute *now* while the market is down? Contribute *more* because the market is down?

Someone above briefly mentioned dollar cost averaging, which is the answer to this question in particular.

The idea is this. It is good to own shares that were bought when the market was down. That's the "buy low" component of "buy low, sell high." But timing the market is hard. Luckily, you can raise your odds of buying low without trying to time the market at all. Just put the same amount of money into the market each month. When the market is down, that money will buy a lot of shares. When it is up, that money will buy fewer. The result is that you'll end up holding disproportionately many shares that were bought low, when the market was down — which is a good situation to be in.

(Obviously, timing the market perfectly would be a better situation. But you can't do that, especially if you're not any kind of expert, so don't try.)

So. That's one of the reasons some people are suggesting a constant monthly investment — because if you do it consistently over a long enough span of time, you'll end up with a good number of shares that were bought low even if you have zero sense of timing. (Another reason people are suggesting it is that it's a convenient set-and-forget thing to do, which raises the odds that you'll keep doing it over a long enough span of time to matter.)
posted by nebulawindphone at 7:36 AM on October 11, 2018

Agree with above: if you think you are likely to experience an unpredictably extended period of unemployment over the next few years, then you are right to have a significant amount of money in cash or cash equivalents. Maybe a few medium-ish term CDs. The return is low, but you are thinking of this money as insurance rather than an investment. (But does it all need to be? Do you really think you are looking at a year-plus? Only you can answer that question.) If you don't think that, or you don't need all the money for that purpose, you need to pull up your socks and contribute regularly to a low-fee fund and stop worrying about short-term ups and downs. The thing about that whole adult business is that it requires some self-discipline. Your losses right now are paper losses, which mean nothing unless and until you have to convert them to real ones.

I would ask: what exactly is it you think you're getting out of Betterment? in some circumstances they may offer some modest benefits in terms of tax-harvesting but for most people's ordinary portfolios, it is basically useless and you are getting next to no value for your .25% (which is on top of the fees the funds themselves charge). Your big enemy over time is useless fees. They may look small, but over time they really add up. If you can't answer the question, you need to get out of Betterment and put yourself in a Vanguard Target Retirement fund, which will not only diversify you over the range of investments, it will automatically adjust allocation between stocks and bonds as you get older. Vanguard will charge you nothing overall if you opt for electronic service and a TR Fund will be sub-.2%. If you don't trade individual stocks (which you shouldn't), but stick to their mutual funds, you won't be paying commissions on trades, either.

Generally the advice that would be provided is that you should put little bits of money in the market, consistently over time. That way you “dollar cost average,

Just FYI, that is not the general advice of people who have reviewed the research. Most of the time, when costs are taken into account, you do worse this way than moving a lump sum in at once. But it's better than not investing at all.
posted by praemunire at 7:47 AM on October 11, 2018 [1 favorite]

(Actually, now I see that your money is in Vanguard through Betterment, which means that you are paying 0.25% for the privilege of having them send your money to Vanguard. You can do better than that.)
posted by praemunire at 7:51 AM on October 11, 2018 [1 favorite]

"Well, fuck me for trying to be responsible with my money - I've already lost a few thousand dollars as the market is spiking down like crazy and predicted to get worse."

Nah, ignore the predictions, the people writing them don't know anything more than the people that actually helped set the current price levels by putting a bunch of money on the line.

You did the right thing by moving this money out of savings. But this is the tradeoff--higher risk for larger long-term return. That tradeoff only works if you can ignore the day-to-day fluctuations and let the money sit for years.

Why do you even know how much the value changed by? Don't waste your time checking every day.

Log out of that account and set a calendar reminder to check on that money in a year. Otherwise, forget about it.
posted by floppyroofing at 8:16 AM on October 11, 2018 [1 favorite]

I'm not endorsing Betterment, but if you are paying them anyway, you should enable the free feature on your account called "Tax Loss Harvesting".

This feature will sell your investments that have a loss and replace them with similar investments, dollar for dollar. Since they are similar investments, it doesn't change your portfolio to any extent. But it provides you with a capital loss on your income taxes. You can deduct up to $3000 of capital losses directly from your income taxes and any extra loss can be carried over to the next year. If you are in the 22% tax bracket, that deduction saves you $660 on your income taxes next year.

For example, if you are holding Vanguard Total Stock Market with a loss, they will sell that and exchange it into the similar Vanguard S&P 500 fund.

Note that you have to wait at least 30 days after selling for a loss before buying the original back again or else your loss is disallowed through the wash sale rule. But if they replace your fund with a similar fund, it shouldn't matter much whether you ever buy back the original. The Betterment Tax Loss Harvesting algorithm should be smart enough to avoid a wash sale automatically.
posted by JackFlash at 11:06 AM on October 11, 2018

The stock market goes up and down much more than other investments. It takes time to come back but your money will bounce back faster if you leave it in the market than if you have a hit and the take it out at the bottom to reinvest it in something safer. Here is an example from a pretty bad year.

At the same time, if you have a five horizon for a significant part of your money then leaving some in cash (or short term bonds) makes sense. Right now it sounds like you have a split that is 40% cash/6% bond/54% stock. Assuming that the money in cash is enough that it will tide you through some tough times if you need it, then the stock part can be viewed as the longer term part - the money that you will need in 10+ years while the cash (or maybe short term bonds or treasuries) is the part that will be more sure to hold its value if you need it in the short term.
posted by metahawk at 12:55 PM on October 11, 2018

Real talk. No one plans to panic sell at the bottom. There are exactly zero people who diligently contribute to their retirement accounts for years and years with the goal of waiting until the market plunges 40% in a few weeks and then withdrawing it all, locking in the loss. None. The fact is that they do, because they can't emotionally handle the pain (and it is very real pain) of seeing their hard-earned accounts down so much. There is a very real reason that Vanguard studies show the optimal number of times to sell investments is zero. Read that sentence again. Every time you are tempted to transfer something to a "better" or "safer" investment, don't. Because, statistically, everyone picks the wrong time to do so. The real question is, knowing yourself as you do, will you be able to ignore the ups and downs and stay invested? It's much more a personal question than an investment one.

Admittedly, it is tempting to think you are smarter than everyone. I have spent a lot of time learning about the stock market, can tell you what a collateralized debt obligation is and who might buy one, and 100% of my retirement contributions are going into a Vanguard Target Date fund. Because I know enough to know that I don't know anything. I thought the market was going to plunge after Trump got elected, and instead it's up 14% this year alone. I thought Google was a bad investment when it went public. The market is fundamentally unknowable, despite the existence of numerous newspapers, blogs, spendy investment newsletters, and fund managers whose livelihood depnds on you thinking otherwise.

That said, having a cushion of ready cash is an excellent idea. Michelle Singletary is a realistic advisor that I really like, and she recommends having a "life happens" fund to cover expenses that pop up, like car repairs, and an emergency fund, not to be touched except in case of serious misfortune, like job loss or major medical problems. Once you have those, pay off debt (because paying off debt is a risk-free return, and also reduces the anxiety that might make you panic sell). Finally, invest in a target date fund and check it, at most, quarterly.

Finally, don't despair about retirement. If you save 10% of your income for 40 years, you'll have plenty. 10% seems like a lot, but there are tax benefits and the hardest part is getting started.
posted by wnissen at 1:16 PM on October 11, 2018 [2 favorites]

can tell you what a collateralized debt obligation is

I have sued people over collateralized debt obligations and all of my long-term retirement money is in Vanguard indexes, most of it in a target retirement fund.
posted by praemunire at 1:28 PM on October 11, 2018 [2 favorites]

(Nitpick, but Betterment's Tax Loss Harvesting isn't doing exactly what you say -- that's an illegal wash sale. They have a high tech way to dodge the wash sale rules that isn't totally clear to me, but what is clear is that they're confident it's not a wash sale. Tax Loss Harvesting is the best reason to use Betterment. Without that benefit, the Betterment fees really eat into your long term earnings.)
posted by heresiarch at 1:33 PM on October 11, 2018

that's an illegal wash sale

First off, wash sales are not illegal, they just change your tax basis, so forget the "illegal" stuff. But in my example, it isn't even a wash sale. That is pretty much how Betterment does it. There's nothing "high tech" about it except that they have algorithms to do it automatically.

As Betterment says, a wash sale is when you buy a "substantially identical" investment as a replacement. What Betterment does is buys a replacement fund that is not "substantially identical" but a similar fund that correlates closely with the sold fund.

So, as in my example, replacing the Vanguard Total Stock Market Fund with the Vanguard S&P 500 fund is not a wash. The two funds are not "substantially identical" but they do have similar investment behavior, and therefore avoids the wash rule.
posted by JackFlash at 2:03 PM on October 11, 2018

The first two months of 2016 were kind of gross with respect to the markets. If you'd put money into a fund tracking the dow in December of 2015, you'd have seen about 10% of it disappear by February. If you'd backed out, you'd have lost that 11%. If you'd held it, you'd have like a 50% return on your investment right now.

I cashed shares of a mutual fund I'd bought in 2002 in 2009. If I'd held it the value today would have quadrupled.

Just only put in as much as you can afford to lose, avoid looking at your funds there's bad news, and uninstall any apps that show you how much money you have moment to moment from your phone. Having that info on your phone readily available just leads to suffering because of our aversion to loss:

Yes, its possible that you could lose everything, but in that case we'll all be in the same boat and there will be a bigger picture crisis to care about. More likely (give that you are diversified), you will gain back your losses over time and then some. Obviously this does not apply to individual stocks.
posted by ProtoStar at 9:40 PM on October 11, 2018

« Older Leinster rugby tips/suggestions?   |   Powder eyeliner reccs Newer »
This thread is closed to new comments.