Can there be such a thing as a good problem? Isn’t that an oxymoron? I guess it is. If I was heavily invested in the stock market, but still have some excess cash to invest, I may be the victim of a good problem. Unfortunately I am NOT, but am looking forward to this problem later in life. I’ve heard that the market operates in a seven-year cycle. So I decided to see for myself. The stock market or S&P 500 index was rising in the early 90s (reason being the dot com era), then falling, then again in the late 2000s (reason being housing bubble), then falling – Great Recession, and then rising again around 2010 and continuing too. (see S&P chart below from about a week or so ago).
From 1989 to 1999, the rise was 10 years long. From 2003-2007, the rise was 5 years long. And from 2010 to 2017, the rise has been for 8 years so far. So it’s not really 7 years at a time, but the average from my calculation is 7.6 (10 years + 5 years + 8 years = 23 years/3 cycles = 7.6 years). If and when it drops, which I’m thinking could be soon, I may be in a better position to buy (even though buying in a market downfall is a very hard thing to do). Anyway, let’s continue to focus on what’s right now – back to reality.
Market Seems High
For the past 3 months, the Dow has been in the 19,000 to mid-20,000 point range – an all-time high. But what if it continues to get higher and an opportunity to get in was lost: Investopedia believes this is possible as it states “while stocks may be expensive now, they might become more expensive later. These securities could even be in a secular bull market, which is an extended period characterized by upward price movements” Investopedia’s case for buying. Also remember that the future value of money is less than what is today. For example, at a 3% inflation rate $100 today may be worth around $75 in 10 years due to inflation and thus decreased purchasing power. Check out this chart (click to expand) from ObservationsAndNotes:
Am I Better Off Holding Cash?
Not a whole lot probably enough to fund an emergency account and a bit more to fund an opportunity you may have waited for. The logic for hoarding cash depends on your age too. If your younger (40 or below), it’s better to buy stock because you have time on your side and if the market is high, it can continue to go high and you’ll profit. However if it falls, you still have time to recover and cut your losses or hold on and be patient in the hopes that, based on past history, the market will bounce back once again.
If your more experienced in life (note I didn’t say older :-), then still don’t hold cash, rather invest in a bond fund. You’re invested and still have the flexibility to sell and but into something else when a great opportunity arises. A lot of financial publications say that time in the market is more important and gives you a much greater shot at achieving financial independence than timing in the market. So if you’re young or old, when is the best time to get into the market…..how will you know? Oh you’ll know. Just kidding, you won’t really know and no one does. I don’t believe in timing the market. I believe in consistency, establishing prudent financial habits, setting a reasonable budget which includes an investment line item.
Don’t Stop Dollar Cost Averaging Though
Of course if you’re in your organizations retirement plan, you should definitely continue to invest in it. Overall you may be investing at a bit of a high time, but what if you decide to forego it and take the extra money in your paycheck. Without going into the details of this, there are drawbacks. One: you’ll lose out on the tax deferred benefit of investing now in your retirement plan and not having to pay tax till years later when you retire. Two: if you get a company match, which many do, you’ll lose out on FREE money! Three: you’ll run the risk or incur the temptation of having the extra money in your paycheck (which will be less by the way because you’re going to get the after-tax amount) and may not be disciplined enough to save it – “hey I got a few hundred bucks to spend now, how about another big screen TV in a different room”. If you were invested in the retirement plan and contributing regularly without any financial problems, chances are you don’t have an immediate need for the money anyway.
So are you buying, selling, or holding on and riding the wave right now? Please share below.
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