Is now the right or wrong time to invest in diversified mutual funds?
November 19, 2007 12:41 PM   Subscribe

Is now the right or wrong time to invest 50k in diversified mutual funds?

The basic plan of action is 60% U.S. large cap, 20% U.S. small cap, 20% foreign decided by filtering funds on morningstar and buying through vanguard, avoiding front loading funds.

The other pertinent facts are that I am investing on behalf of my father-in-law (colombian) for his grand-daughter (Colombian/Irish born in USA, my daughter) and I'm Irish. Not sure if this makes any difference other than the fact that I can probably take advantage of tax savings investments in either Europe and/or the US (and Colombia but I don't think so).

posted by lapsang to Work & Money (18 answers total) 3 users marked this as a favorite
Dollar-cost averaging can reduce the risk of market timing.

Any particular reasoning behind the asset allocation you mentioned? It probably isn't what I'd pick but I'm not you, nor am I your financial advisor. And speaking of financial advisors...I don't normally think $50k is too much to invest on your own (assuming you're willing to educate yourself), but if you think tax implications will complicate things it's probably a good idea to find an advisor.

(And I recommend David Swenson's book just about every time a thread like this comes up.)
posted by mullacc at 12:52 PM on November 19, 2007

Common wisdom these days is that you should weight your investments outside the US. As far as market timing: well, it's anyone's guess. Mullacc is right that dollar-cost averaging is an approach to reducing negative impact of short-term fluctuations. It doesn't really address the question of whether the market is going to take a major dive some time in the next n months or years.
posted by alms at 1:02 PM on November 19, 2007

There were some good answers in my similar question.
posted by the jam at 1:18 PM on November 19, 2007

Response by poster: mullac - re: that allocation ...its more like an early working premise but yes I will get a financial advisor to ensure I'm doing this tax-smartly and I will also consider dollar cost averaging.

incidentally how does one go about finding a good financial advisor (in zip code 07302)?

thank you for your wisdom!
posted by lapsang at 1:20 PM on November 19, 2007

NAPFA -- find a fee-only financial advisor near you
posted by junkbox at 1:43 PM on November 19, 2007

Why a mutual fund? Most of the money will get wrapped up in fees from the company. Why not choose a good raft of blue chips and tech stocks and then invest that way. You'll get away from mutual fees and have control over your investments.
posted by parmanparman at 1:49 PM on November 19, 2007

Well, the snarky answer is that if someone knew the answer to your question, they wouldn't have to work another day in their life. Assuming that, by definition, the "right time" is a time in which your investments will improve after the date of investment, and the "wrong time" is a time in which your investments will decline (or will not appreciate as rapidly as possible alternative investments), I don't think you're likely to get very helpful advice from the Ask MeFi community. I've yet to find anyone who can predict the future, and nobody here can tell you with any degree of certainty what gain you're going to make on any particular timeline. If you're looking to invest over a long period of time, the stock market has a pretty good track record and has weathered some significant storms. If you invested on September 10, 2001, when the market closed at 9605, you were pretty bummed on September 21, 2001 when the market closed at 8235 (having lost almost 15% in value in 11 days). However, if you hung in there, the market closed today at 12958, which represents a gain of 35% since 9/10/01 (and of course it's been higher than that).

In short, nobody knows for sure. But if you view it as a long-term investment, history would tell you it's never a "bad time" to invest in the stock market (including through mutual funds).
posted by pardonyou? at 2:22 PM on November 19, 2007

Man, investing advice is overwhelming: go mutual funds! go index funds! go individual stocks! go targeted funds!

I think the most important thing is just to go! Time is your friend. An adviser can help you do things in a tax friendly way, and help you avoid fees or pick funds, but just do something.
posted by dpx.mfx at 2:31 PM on November 19, 2007

Another thing to consider. If you decide to go in all at once, look at ETFs. They are like mutual funds, except trade like stocks. They typically have slightly lower fees and the transaction costs are low when you buy as a lump sum (ie, only one $9.99 fee for a whole lot). The lower fees can save you money over time.
posted by cschneid at 2:45 PM on November 19, 2007

There is no way of knowing what the market will do in the future, but if the past is any guide, the market goes up more often than it goes down. If this is a long term investment, which is sounds like it might be for a grand-daughter, then there is no better time to invest than the present. Dollar cost averaging a lump sum is a way for timid investors to prevent buyers remorse if they are unlucky enough to experience a market drop shortly after the investment. But all studies have shown that statistically, a lump sum investment beats dollar cost averaging more than two-thirds of the time. If you just make your investment and forget about it, 20 years from now you probably won't care what happened in the 6 months or year after your investment.
posted by JackFlash at 4:02 PM on November 19, 2007

ETFs typically have slightly lower fees and the transaction costs are low when you buy as a lump sum (ie, only one $9.99 fee for a whole lot).

With $50,000, you can get free trades through Bank of America or Wells Fargo, and of course Zecco, so that makes them even cheaper.
posted by kindall at 5:23 PM on November 19, 2007

Why a mutual fund? Most of the money will get wrapped up in fees from the company.

Hopefully the poster is talking about index funds, which have very low feeds.
posted by smackfu at 5:58 PM on November 19, 2007

If you think the market is likely to go down in the near future, it would be foolish to take a long position in it for the time being.

Personally, I think it's likely to go down further in the near future. If you're interested, I can explain why.
posted by Coventry at 6:15 PM on November 19, 2007

If you think the market is likely to go down in the near future, it would be foolish to take a long position in it for the time being.

Certainly, buying in a few equal installments over the next year or two would be a better idea, but if your time horizon's long enough, there's really no bad time to buy.
posted by kindall at 9:13 PM on November 19, 2007

Response by poster: Coventry - yes pls explain why you think the market will drop further. Cheers
posted by lapsang at 4:26 PM on November 20, 2007

The US is facing problems which to me seem very similar to those Japan faced in the nineties: a huge real estate bubble driven by lax credit standards, and lots of bad debt which no one wants to confess as such. The situation is a bit worse, because the US itself owes so much, and has relatively little industrial capacity compared to Japan.

I believe that asset prices have risen over the past few years because easy credit has freed up (or in the case of federal reserve bank loans, created) lots of money, fueling a typical bubble mentality. People have been buying stocks and houses not because of their intrinsic worth, but because they anticipate further price inflation. Now that credit is tightening, that is no longer likely to work. It seems as though every bubble works this way. In his history of the 1929 stock market crash, Galbraith describes a situation which I find eerily similar to today's circumstances. (But I doubt that things are going to be that bad, this time around.)

Also, lax credit has at least lubricated, if not directly enabled, a great deal of the consumer spending over the last few years. Whether you think people have been living beyond their means or not, personal debt in the US has risen a great deal. To me it indicates that people have been living beyond their means, and with credit tightening, and lower house prices reducing the collateral against which people can borrow, people are going to spend less. Since stock prices supposedly represent anticipated earnings, and most US companies depend on sales to US consumers, that will reduce the intrinsic value of US stocks.

The federal reserve may decide to continue to lower their interest rate targets, and that will continue to temporarily buoy the nominal prices of stocks at the cost of further weakening the dollar. However, they can only go so far with this game, and weakening the dollar too much will have negative effects on the economy, too. Rising import prices can have just as big an effect on consumer spending as tightening credit, for instance.

Most of the facts I've mentioned here have been pretty clear for years to anyone who's been paying attention, and for much of that time, there's been an enormous price boom. What's changed now, in my opinion, is that the lax credit which was driving the price boom is now ending.

I am not an economist, and these are just my personal beliefs. I've come to these conclusions mostly through reading the blog Calculated Risk and Galbraith's history. You'll find lots of interesting contemporary financial data on that blog.
posted by Coventry at 8:42 AM on November 21, 2007

It is not clear where you actually pay taxes (as opposed to what your citizenship is). Below advice only applies to people who are taxed in US. This time of year they need to pay special attention to tax issues.

Many mutual funds make redistributions at the end of the year. This is by no means a law, but a common convention - check your target funds' prospectus for information. This is bad news for new investors into the fund. Imagine this situation: you bought 10,000 shares of a fund with a NAV of $5 - a total of $50,000 of equity. The day after you bought these shares, the fund makes a distribution of $1 per share. Since $1 worth of value per share has officially left the building, the fund's NAV should drop by $1 to $4. So now you have $4 * 10,000 in mutual fund and $1 * 10,000 in cash (ignoring the fact that most people choose to have their fund dividents immediately reinvested, doesn't make any difference here). Your total wealth is still $40,000 + $10,000 = $50,000 - so nothing has changed in the short term. BUT, now that you've received capital gains, uncle Sam will want a chunk of that. Assuming tax rate of 20%, you will see 20% of $10,000 = $2,000 disappear into the government coffers, through no fault of your own aside from buying at the wrong time.

The above example uses exagerrated figures to illustrate the principle. Your actual loss to taxes would likey be less. But it's best to lose least! Had you bought the fund in the beginning of the year, the gains in the fund proceeds will have hopefully made up for the taxation equaity drop, and you would have come out ahead. Buying a day before distribution, you have no fighting chance.

Conclusion: whatever fund you decide on, find out when they do distributions. If they do these in December, don't buy until January.
posted by blindcarboncopy at 12:30 AM on November 22, 2007

You definitely want to see a financial planner about stocks. A good financial planner will discuss whether you are interested in long-term v. short-term investment, how risk adverse you are, hold old your daughter is and what she'll be using the money for, and of course, the tax consequences.

I'm also looking to invest, but only $5K. I've been watching CNBC in the mornings for the past few months. From what I've gathered, oil stocks are doing well, but no one is sure if they have hit the top or if it'll continue to go up. Energy, railroads, and tech are also doing well. Financials are doing terrible and extremely risky. Although the saying is buy low, sell high, many mortgage companies are closing up shop in the credit crisis. Wal-Mart and Home Depot had a low stock value recently, but w/ the holiday retail season, I expect it'll keep going up, so you might want to hold off on stocks like those until mid-year of 2008.

I hope that helps.
posted by dannon205 at 12:21 PM on November 24, 2007

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