Substantial initial investment + Overvalued market = Trouble?

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hithere
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Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Sat Mar 31, 2018 6:54 am

Hey Bogleheads,

I've been reading this website for a few days, and I absolutely love it. This investment philosophy really resonates with me, and the in-depth coverage of so many topics is awesome. I think I'm going to be a boglehead for the rest of my life. :)

I'm 29, a resident of the EU, and I've been fortunate enough to be in a great financial shape. I've done my research and I know where I want to invest my retirement money eventually. I've chosen a couple of low-cost stock ETFs (one European and one American) that offer good returns and benefit from fairly favorable taxation. I'm young and have plenty of time to recoup any stock market loses, so I'm not that scared of volatility.

BUT... My current savings equal to half of the total inflation-adjusted money that I expect to be able to put aside for investing until I retire. As an example, if my plan is to save up and invest a total of 100K worth of today's-euro purchasing power until I retire, at the moment I have 50K euros. This means that those 50K will greatly benefit from compounding returns over many years (36 years if I retire at 65), but this also means that I can't use the dollar-cost-averaging effect for half of my retirement savings, so I will have to try to "time" the market in one way or another.

If the markets were fairly valued, I would've already jumped in, but the record high stock prices, low interest rates, and enormous government debt scare the hell out of me. What if I put 50% of my total retirement savings into the stock market right now and it crashed? Sure, (ideally) it would regain the loses within a few years, but that doesn't negate the impact of that wrong move on the average annualized return of my retirement savings.That's why in the past 2 years I've been holding cash and waiting for the stock market to crash, so I can buy ETF shares at a lower price. This appears to be the sensible thing to do, or is it?

What would you do if you were me?

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Watty
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by Watty » Sat Mar 31, 2018 8:29 am

There is a wiki on Dollar cost averaging if you have not seen it.

https://www.bogleheads.org/wiki/Dollar_cost_averaging

and also one on investing a windfall.

https://www.bogleheads.org/wiki/Managing_a_windfall
hithere wrote:
Sat Mar 31, 2018 6:54 am
What would you do if you were me?
There is not one right answer but I would probably invest the money by dollar cost averaging it over a very long period of time like five years. That is pretty extreme but that would let me sleep at night. I would also probably use a more conservative than average asset allocation like 40% bonds and 60% stocks, but again that is just me.

You are only 29 so you may be on the borderline of being settled down enough to be ready to buy a house that will suit your needs for a long time but you might also earmark some of the money for buying a house someday. There is no hurry but if plan to use XXX,XXX euros to buy a house when you are 35 to then that money would be invested more conservatively. I don't know how your local housing market but some of them are pretty bubbly right now so if your local market high I would be real cautious. The idea of eventually buying a house is to live rent free for decades, not to make a lot by having the house price increase.

Marketman
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by Marketman » Sat Mar 31, 2018 8:33 am

Everyone has a different opinion here and there is no one right answer. If it were me I would invest everything at once with a conservative asset allocation of 50/50 stocks/bonds. I would rebalance only if stocks declined. (Sell bonds and buy more stocks to get back to 50/50.) If stocks rise, I would let the portfolio grow into a more appropriate AA for you age of maybe 70/30 or so. As you add money, I would add to the stock side so it would again grow to the more appropriate AA of 70/30 or so.

There are many ways to skin this cat but this is my favorite in this situation.

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badbreath
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by badbreath » Sat Mar 31, 2018 9:46 am

by Marketman »

Everyone has a different opinion here and there is no one right answer. If it were me I would invest everything at once with a conservative asset allocation of 50/50 stocks/bonds. I would rebalance only if stocks declined. (Sell bonds and buy more stocks to get back to 50/50.) If stocks rise, I would let the portfolio grow into a more appropriate AA for you age of maybe 70/30 or so. As you add money, I would add to the stock side so it would again grow to the more appropriate AA of 70/30 or so.

There are many ways to skin this cat but this is my favorite in this situation.
I like this plan, I would be all in now.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

RealHornblower
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by RealHornblower » Sat Mar 31, 2018 10:03 am

hithere wrote:
Sat Mar 31, 2018 6:54 am
That's why in the past 2 years I've been holding cash and waiting for the stock market to crash, so I can buy ETF shares at a lower price. This appears to be the sensible thing to do, or is it?
The S and P 500 was at $2,072 one year ago. It is now at $2,640. This means it would have to have a 21% decline from it's current level, just to get back to the level at which you decided it was too expensive to buy two years ago. If you had 50k euros 2 years ago, the decision not to invest has already cost you 13,700 euros, even without counting dividends. Although emotionally losing money feels very different from simply not gaining money, the effect on your bottom line is exactly the same.

So now you are worried about losing what you invest into the market. But you should *also* be worried about what you will lose by not investing, because that risk is just as real. If anything, it's more likely, since the market goes up most of the time. You should be *more* worried about losing the money you could be gaining as you are of losing money you already have.

This is what Bogleheads mean when they say "you can't time the market." You thought the market was due for a crash, and eventually the market will crash. But that won't make the decision to not invest a good one. If the S and P 500 drops down to $2,400, or $2,300, or $2,200, next week, it will still be significantly above the point you could have invested at two years ago. And that same logic holds going forward. If the market goes to $4,000 over the next five years, then has a major crash down to $3,000, you still would have been better off investing today than waiting. And that risk is, if anything, more likely than the risk that the market will drop significantly right after you invest.

Topic Author
hithere
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Sat Mar 31, 2018 10:12 am

@Watty, thanks for the articles, there are some really good tips there. I could buy my dream house now - it would cost about 60% of my current net worth, but the real estate market seems a bit overvalued to me. Taking a few assumptions into account, I think that if the stock market returns more than 8% net on average (which it should, at least in the very long run), then it's a better investment than buying a house. And I also don't mind renting for the rest of my life if that's the financially sound thing to do. Dollar cost averaging over a few years is worth considering, I'll give that a thought.

@Marketman suggested that I build a more conservative portfolio by including bonds, and then gradually selling the bonds and buying stocks. It sounds like a good idea. I'm planning my ultimate portfolio to consist of 100% stocks, and I'll keep it that way until I'm 50 or so years old. I have plenty of time until retirement, so I prefer to be in stocks only in order to maximize my returns. Once I get into the market, I'm not planning on selling at least until I retire, no matter what happens.

@RealHornblower, yeah, I realize that. :( I've missed on a lot of gains. But at the same time this bull market should end sooner rather than later, should it not? If it goes down by 30-40%, then the S&P 500 will end up at about $1600-1850. Also, the growth of the S&P 500 for the past 2 years has been more modest when denominated in euros.

A part of my fear was caused by a couple of doomsday economists I used to listen to. Maybe I should just stop agonizing and either dollar cost average and enter the market, or build a more conservative portfolio and enter the market, as the gentlemen above suggested.

Thank you all for the help!
Last edited by hithere on Sat Mar 31, 2018 2:22 pm, edited 2 times in total.

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Silly Wabbit
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by Silly Wabbit » Sat Mar 31, 2018 12:54 pm

hithere wrote:
Sat Mar 31, 2018 10:12 am
@RealHornblower, yeah, I realize that. :( I've missed on a lot of gains. But at the same time this bull market should end sooner rather than later, should it not? If it goes down by 30-40%, then the S&P 500 will end up at about $1600-1850. Also, the growth of the S&P 500 for the past 2 years has been more modest when denominated in euros.
Who knows. If calamity were such a sure thing, the market would have priced it in already.

3funder
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by 3funder » Sat Mar 31, 2018 1:12 pm

hithere wrote:
Sat Mar 31, 2018 6:54 am
Hey Bogleheads,

I've been reading this website for a few days, and I absolutely love it. This investment philosophy really resonates with me, and the in-depth coverage of so many topics is awesome. I think I'm going to be a boglehead for the rest of my life. :)

I'm 29, a resident of the EU, and I've been fortunate enough to be in a great financial shape. I've done my research and I know where I want to invest my retirement money eventually. I've chosen a couple of low-cost stock ETFs (one European and one American) that offer good returns and benefit from fairly favorable taxation. I'm young and have plenty of time to recoup any stock market loses, so I'm not that scared of volatility.

BUT... My current savings equal to half of the total inflation-adjusted money that I expect to be able to put aside for investing until I retire. As an example, if my plan is to save up and invest a total of 100K worth of today's-euro purchasing power until I retire, at the moment I have 50K euros. This means that those 50K will greatly benefit from compounding returns over many years (36 years if I retire at 65), but this also means that I can't use the dollar-cost-averaging effect for half of my retirement savings, so I will have to try to "time" the market in one way or another.

If the markets were fairly valued, I would've already jumped in, but the record high stock prices, low interest rates, and enormous government debt scare the hell out of me. What if I put 50% of my total retirement savings into the stock market right now and it crashed? Sure, (ideally) it would regain the loses within a few years, but that doesn't negate the impact of that wrong move on the average annualized return of my retirement savings.That's why in the past 2 years I've been holding cash and waiting for the stock market to crash, so I can buy ETF shares at a lower price. This appears to be the sensible thing to do, or is it?

What would you do if you were me?
I'd probably invest at least half the money soon. Your risk is somewhat mitigated by the fact that you are invested in ETFs that are comprised of holdings that are diversified by geography, industry, sector, etc.

SimplicityNow
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by SimplicityNow » Sat Mar 31, 2018 1:28 pm

Maybe you should spend more time soaking up the knowledge and information here and less time listening to talking heads on TV with an agenda.

You are discussing market timing. You are rationalizing and trying to come up with valid excuses for it, but at the end of the day that is what is is.


Before you can overcome your psychological fear, you need to learn more.

Start with the book, You're money and Your brain by Jason Zweig.

Read a few more books on behavioral factors in investing.

Once you learn more and and understand why people make bad investing decisions, you will be better prepared to avoid those mistakes.

In my opinion until you do, even with all the good advice you get here, you are only one news article or television commentator away from making poor choices regarding your investments.

Just my 2 cents.

MoneyMarathon
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by MoneyMarathon » Sat Mar 31, 2018 1:47 pm

hithere wrote:
Sat Mar 31, 2018 10:12 am
But at the same time this bull market should end sooner rather than later, should it not?
This is an extremely dangerous assumption. For example, if you got out of the market in 1996 -- the year the phrase "irrational exuberance" was uttered by Greenspan -- because it was an aging bull, that could be called financial suicide. You will never get those prices back.

On the other hand, if you bought right at the top in 2000 or 2007, you might feel dumb, but there were strong gains over the next few years that erased all of the losses. Years of strong gains historically have followed not long after (within about 5 years) years of big losses. For example, 2003 and 2009 were great years, but people who got scared out of the markets didn't participate in them.

Calling tops to is a losing game. Most years, the stock market is up. Neither valuation nor the age of the bull have good enough predictive power for the following year to make it wise to pull out of the market because of a stretched valuation or an old bull market.

When investing, pick an asset allocation you can live with, whether the market drops 30% or goes up 30% next year.

When the bull ends, and it will, just keep investing. There will be another bull.

RRAAYY3
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by RRAAYY3 » Sat Mar 31, 2018 4:19 pm

I bought at the “all time high” March 2017 ...

Even after this recent correction / volatility - I’m up approximately 10% from that all time high

Time in - not timing - and an allocation that will keep you in, is all that matters

Nearly A Moose
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by Nearly A Moose » Sat Mar 31, 2018 8:14 pm

Sounds like you won’t need this money for 20-30 years. Do you really think the extent to which you believe the market is overvalued now will really make a difference? It could double multiple times between now and then. Why wait for a 10% drop?
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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Re: Substantial initial investment + Overvalued market = Trouble?

Post by whodidntante » Sat Mar 31, 2018 8:30 pm

A lot of bogleheads have more than the amount that is troubling you currently invested in the market. And for many of us it is in a tax advantaged account, so we could sell without tax consequences. If I'm going to advise you to DCA, then I should sell and do that myself. I'm not going to sell and DCA back in. If you want to own stocks, put the buy order in.

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hithere
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Sun Apr 01, 2018 1:18 pm

First of all, I would like to thank everyone who has participated in this topic. You've really helped me make my decision.

I did some calculations and considered different scenarios. Having my goals and personality in mind, I figured that my best bet would be to dollar cost average over the next 5 years, as suggested in the topic, and have a stock-only portfolio. Until I invest the last bit of money in 2022, I will have some spare cash laying around - I plan on making some less-volatile investments outside of the stock market with it, so that their purchasing power doesn't erode during the 5-year DCA period. Bonds could be a good choice for that money, but I don't like bonds. :)

I feel confident about this plan. According to my calculations, I will be able to retire comfortably even if the real net return from the stock market is just 2% during the 36 years I have until retirement. If the markets are nice to me however, I may even be able to retire earlier than planned.

Thanks again for helping me out!

RamblinDoc
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by RamblinDoc » Sun Apr 01, 2018 1:31 pm

Everyone is different. I had a similar dilemma as I learned about BH recently.

In my situation, I chose my AA and put 50% in a few months ago and am automatically DCA’ing the rest over the next 12 months. It makes me sleep better.

Best of luck!

MoneyMarathon
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by MoneyMarathon » Sun Apr 01, 2018 1:33 pm

That's why in the past 2 years I've been holding cash and waiting for the stock market to crash, so I can buy ETF shares at a lower price
The lesson here is that attempting to get the timing perfect is costing you dearly (as it alread has). There is zero reasonable expectation of return from waiting and sitting on cash.

You could invest it all today at 40% stocks / 60% bonds, if that is the level of risk you can handle.

Understand that it can go up each year for the next 5 years. If it does, will you be able to stay on course?

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hithere
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Sun Apr 01, 2018 1:48 pm

MoneyMarathon wrote:
Sun Apr 01, 2018 1:33 pm
You could invest it all today at 40% stocks / 60% bonds, if that is the level of risk you can handle.

Understand that it can go up each year for the next 5 years. If it does, will you be able to stay on course?
For now, I prefer to stay away from bonds.

I can't say for sure whether I'll be able to stay on course since emotions are a powerful motivator. However, now that I am aware of their negative influence on my returns, I think I will be able to stick to the plan.

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Re: Substantial initial investment + Overvalued market = Trouble?

Post by pkcrafter » Sun Apr 01, 2018 3:44 pm

hithere wrote:
Sat Mar 31, 2018 6:54 am
Hey Bogleheads,

I've been reading this website for a few days, and I absolutely love it. This investment philosophy really resonates with me, and the in-depth coverage of so many topics is awesome. I think I'm going to be a boglehead for the rest of my life. :)

I'm 29, a resident of the EU, and I've been fortunate enough to be in a great financial shape. I've done my research and I know where I want to invest my retirement money eventually. I've chosen a couple of low-cost stock ETFs (one European and one American) that offer good returns and benefit from fairly favorable taxation. I'm young and have plenty of time to recoup any stock market loses, so I'm not that scared of volatility.

Very much sounds like you are scared of volatility

BUT... My current savings equal to half of the total inflation-adjusted money that I expect to be able to put aside for investing until I retire. As an example, if my plan is to save up and invest a total of 100K worth of today's-euro purchasing power until I retire, at the moment I have 50K euros. This means that those 50K will greatly benefit from compounding returns over many years (36 years if I retire at 65),

36 years plus possibly another 25 years.

but this also means that I can't use the dollar-cost-averaging effect for half of my retirement savings, so I will have to try to "time" the market in one way or another.

Do you now have 50k ready to invest?

If the markets were fairly valued, I would've already jumped in, but the record high stock prices, low interest rates, and enormous government debt scare the hell out of me. What if I put 50% of my total retirement savings into the stock market right now and it crashed? Sure, (ideally) it would regain the loses within a few years, but that doesn't negate the impact of that wrong move on the average annualized return of my retirement savings.That's why in the past 2 years I've been holding cash and waiting for the stock market to crash, so I can buy ETF shares at a lower price. This appears to be the sensible thing to do, or is it?

No.
For now, I prefer to stay away from bonds.
So, you are nervous about stocks and nervous about bonds?
I can't say for sure whether I'll be able to stay on course since emotions are a powerful motivator. However, now that I am aware of their negative influence on my returns, I think I will be able to stick to the plan.
I'm planning my ultimate portfolio to consist of 100% stocks
You've sent up several red flags for someone who is considering a 100% stock portfolio. I think the best I can suggest is you read up on behavior and it's significant cost to investors.

Here is our Wiki link--

https://www.bogleheads.org/wiki/Behavioral_pitfalls

Also read a couple of the recommended books. Zweig is a good one.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

chevca
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by chevca » Sun Apr 01, 2018 4:10 pm

hithere wrote:
Sat Mar 31, 2018 6:54 am
That's why in the past 2 years I've been holding cash and waiting for the stock market to crash, so I can buy ETF shares at a lower price. This appears to be the sensible thing to do, or is it?

What would you do if you were me?
Well, 2 years ago you probably could have bought ETF shares at a lower price than today/now. So... sensible... how's that worked out for you? Even after a "crash" now, you may not be able to get them as cheap as they were 2 years ago. You may have already missed the lower prices you could have had. Or, maybe not. We really don't know for sure.

If this money is half your retirement money, you don't need to touch it, it will be left invested for 36 years, and assuming income will cover your expenses and the other half of your retirement money, invest it now per your AA and DCA with your future contributions is what I'd do.

What's a crash to you anyway? There have been some decent dips over the last couple years and you held cash right through them. To me, you have already shown you can't time the market too well.

I do realize you also said in the thread you have come up with a plan. I just wonder how well you will even stick to that. In 30 some years from now, I doubt it will matter much what plan you chose to jump in with. Just jump. :happy

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hithere
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Sun Apr 01, 2018 4:38 pm

Paul, thanks for your input.

I don't think that I'm scared of volatility alone. If I didn't have that significant of a sum to invest now, I would have no problem buying stocks regularly and leaving DCA to do its magic, without ever selling. But with such a chunk of money, timing seems rather important. If I buy now and the market drops by 30%, then I'll have to retire with roughly 30% less money. Of course, the same is true if I don't buy now and the market gains 30%. But seeing these record highs make me believe that a crash is due in the next 5 years. However, I'm not going to try to time the market, rather I'll DCA my initial investment, although strictly speaking, this is also an attempt to time the market to a degree since I'm betting on a crash in the next 5 years. I've done the math though, and whatever happens, I won't feel an urge to sell.

Thanks for the article. I've read it, but I'll read it again now. I've also read a couple of books and listened to several renowned investors talk about the consequences of letting our emotions shape our investment behavior. I think I'll be fine with 100% stocks. Once I buy the ETFs I've chosen, I won't sell, regardless of what is happening with the markets.

I wouldn't say I'm nervous about bonds, it's just that I don't like them. :)

@chevca A crash would be a good 30+% decline, 2008 style, that's what I was waiting for. :)

MoneyMarathon
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by MoneyMarathon » Sun Apr 01, 2018 4:53 pm

hithere wrote:
Sun Apr 01, 2018 4:38 pm
strictly speaking, this is also an attempt to time the market to a degree since I'm betting on a crash in the next 5 years.
Aye, it is.
hithere wrote:
Sun Apr 01, 2018 4:38 pm
I've done the math though, and whatever happens, I won't feel an urge to sell.
Fair enough.

Take another look at bonds, though. They're not that bad. Especially when you also have equities and as an alternative to cash. There are many ways to slice bonds, so you don't have to take much duration risk if you don't like that kind of risk (because you're also betting on rising rates?...).

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Re: Substantial initial investment + Overvalued market = Trouble?

Post by Earl Lemongrab » Mon Apr 02, 2018 10:44 am

When I put together my investing plan a bit over ten years ago, one of my core principles was that I have no talent for timing the market. I proved that by putting in about that same 200k in cash out of a total portfolio of 650k in 2007, right about the peak before the crash in 2008-2009.

I had a plan, followed the plan. Harvested losses, rebalanced, invested new money to plan. I retired this year.

The fact that the market reached an all-time high is irrelevant. It does that all the time. It doesn't presage any near-term event. It's easy for any particular market to find periods where such a high was reached, and the market has never been that low again.

That's especially true if you look at total return versus price. By sitting out, you missed out on the dividends as well as the share value appreciation. Those dividends were likely higher than whatever cash instrument you were using.

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BeBH65
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by BeBH65 » Mon Apr 02, 2018 12:00 pm

hithere wrote:
Sun Apr 01, 2018 1:18 pm
Having my goals and personality in mind, I figured that my best bet would be to dollar cost average over the next 5 years, as suggested in the topic, and have a stock-only portfolio. Until I invest the last bit of money in 2022, I will have some spare cash laying around - I plan on making some less-volatile investments outside of the stock market with it, so that their purchasing power doesn't erode during the 5-year DCA period. Bonds could be a good choice for that money, but I don't like bonds. :)
So it looks like you will be changing your Asset Allocation continously for the next 5 years. At the end of the DCA period you will be fully exposed to the evolution of stock market. Which can crsh the day after you completed your DCA.

On this forum many belief in selecting a more static Asset Allocation that corresponds to your Ability, willingness, and need to take risk.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

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BeBH65
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Re: Substantial initial investment + Overvalued market = Trouble?

Post by BeBH65 » Mon Apr 02, 2018 12:03 pm

The Boglehead principles can indeed apply for an investor from the EU.

Depending on your country of residence there might be better ways to invest then through US-domiciled funds.
Please have a look at our wiki pages: Nonresident_alien_taxation, Nonresident_alien_with_no_US_tax_treaty_%26_Irish_ETFsEU_investing.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

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Re: Substantial initial investment + Overvalued market = Trouble?

Post by nisiprius » Mon Apr 02, 2018 1:35 pm

Investigate the worst-case or at least really-bad-case question, "just how bad would it have been if I had invested once only, at a market peak, in the past."

Let's use March 31st, 2000 as our market peak, and let's look at three investments:

Portfolio 1, blue = the Vanguard Total Stock Market Index Fund (i.e. "stocks,") VTSMX, blue;

Portfolio 2, red = the Vanguard LifeStrategy Growth Fund, VAGSX. (Target date funds didn't exist then, but LifeStrategy is a balanced fund that's about 80% stocks and typical of what might have been recommended for someone aged 29).

Portfolio 3, yellow = "CASHX," PortfolioVisualizer's representation of a cashlike investment based on Treasury bills, and in the same ballpark as bank accounts.

Source
Image

One single investment of $10,000 all invested at once at the peak in the year 2000 would have grown to $26,000 in Total Stock, $23,000 in an investment a 29-year-old might have chosen, and only $13,150 if left in "cash" in a good bank account.

The average annual returns for the two mutual funds were, as you can see in the table at the top ("CAGR", compound average growth rate), were 5.50% and 4.86%, respectively. Those are not exciting numbers, but they are far from losses. You can do retirement planning on the basis of 5% returns.

If we click the "inflation adjusted" box in Portfolio Visualizer, we find that the cash investment would not quite have kept up with inflation, while both of the mutual funds would have turned in a positive real return.

For comparison, if we now imagine investing at the bottom of the near-crash in 2002, September 30th, 2002, well, yes, that is much better.
Image
It's better to invest at a bottom than at a top, nobody disputes that. In this case, your average annual returns were 10.45% and 8.63%, and you're ending up with ballpark $40,000 instead of $20,000. It's also better get five numbers right on the state lottery than just four.

The point is, investing at the tops is not quite as terrible as many people think. And in real life, you would be investing steadily, investing some money at bad times and some at good times... and you probably would be doing it for more than the eighteen years we've illustrated here.

If you can get over the greed of wanting to invest only at good times, I think you can convince yourself that just investing whatever you've got to invest, at the time when you've got it, is a very workable plan. And much better than staying in cash because you are perpetually afraid of investing at a bad time.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

RamblinDoc
Posts: 219
Joined: Sun Jan 14, 2018 2:26 pm

Re: Substantial initial investment + Overvalued market = Trouble?

Post by RamblinDoc » Tue Apr 03, 2018 10:18 am

nisiprius wrote:
Mon Apr 02, 2018 1:35 pm
Investigate the worst-case or at least really-bad-case question, "just how bad would it have been if I had invested once only, at a market peak, in the past."

Let's use March 31st, 2000 as our market peak, and let's look at three investments:

Portfolio 1, blue = the Vanguard Total Stock Market Index Fund (i.e. "stocks,") VTSMX, blue;

Portfolio 2, red = the Vanguard LifeStrategy Growth Fund, VAGSX. (Target date funds didn't exist then, but LifeStrategy is a balanced fund that's about 80% stocks and typical of what might have been recommended for someone aged 29).

Portfolio 3, yellow = "CASHX," PortfolioVisualizer's representation of a cashlike investment based on Treasury bills, and in the same ballpark as bank accounts.

Source
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One single investment of $10,000 all invested at once at the peak in the year 2000 would have grown to $26,000 in Total Stock, $23,000 in an investment a 29-year-old might have chosen, and only $13,150 if left in "cash" in a good bank account.

The average annual returns for the two mutual funds were, as you can see in the table at the top ("CAGR", compound average growth rate), were 5.50% and 4.86%, respectively. Those are not exciting numbers, but they are far from losses. You can do retirement planning on the basis of 5% returns.

If we click the "inflation adjusted" box in Portfolio Visualizer, we find that the cash investment would not quite have kept up with inflation, while both of the mutual funds would have turned in a positive real return.

For comparison, if we now imagine investing at the bottom of the near-crash in 2002, September 30th, 2002, well, yes, that is much better.
Image
It's better to invest at a bottom than at a top, nobody disputes that. In this case, your average annual returns were 10.45% and 8.63%, and you're ending up with ballpark $40,000 instead of $20,000. It's also better get five numbers right on the state lottery than just four.

The point is, investing at the tops is not quite as terrible as many people think. And in real life, you would be investing steadily, investing some money at bad times and some at good times... and you probably would be doing it for more than the eighteen years we've illustrated here.

If you can get over the greed of wanting to invest only at good times, I think you can convince yourself that just investing whatever you've got to invest, at the time when you've got it, is a very workable plan. And much better than staying in cash because you are perpetually afraid of investing at a bad time.
+1

Great reply! I’m following this thread with interest and appreciate your insight.

Topic Author
hithere
Posts: 42
Joined: Sat Mar 31, 2018 5:30 am

Re: Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Tue Apr 03, 2018 2:19 pm

Thanks for the additional input. I've considered the worst and best case scenarios, along with many additional scenarios in between. DCAing over 5 years is what feel most comfortable with at this point of my life.

Considering the recent decline, I feel lucky that I have an opportunity to buy at a nice discount. I think I'll make my investments more frequent though - every quarter for the next 5 years instead of every year.

asif408
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Location: Florida

Re: Substantial initial investment + Overvalued market = Trouble?

Post by asif408 » Tue Apr 03, 2018 3:46 pm

Since you are a resident of the EU, I want to make you aware (if you are not already) than there are plenty of other markets that are far from record highs. Here are just a few examples, including Brazil, Russia, Austria, France, Spain, Italy, and the UK, which are 20-60% below their all time highs: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D

So why not invest where markets are not at all time highs? In fact, all of the countries I mentioned have been below their all time highs for the past 10+ years. You could easily get exposure to these countries and others through broad based index funds.

Topic Author
hithere
Posts: 42
Joined: Sat Mar 31, 2018 5:30 am

Re: Substantial initial investment + Overvalued market = Trouble?

Post by hithere » Tue Apr 03, 2018 6:21 pm

asif408 wrote:
Tue Apr 03, 2018 3:46 pm
Since you are a resident of the EU, I want to make you aware (if you are not already) than there are plenty of other markets that are far from record highs. Here are just a few examples, including Brazil, Russia, Austria, France, Spain, Italy, and the UK, which are 20-60% below their all time highs: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D

So why not invest where markets are not at all time highs? In fact, all of the countries I mentioned have been below their all time highs for the past 10+ years. You could easily get exposure to these countries and others through broad based index funds.
Thanks for the suggestions. I've chosen an ETF that comprises of all developed economies in Europe, but I'm not sure whether I would want to invest in individual countries. The European stock markets are not very developed and may not always represent the general business in Europe as the stock market in US does, even more so when we talk about the stock markets of individual European countries.

I'd rather stick to a wide European ETF for now. I pay no taxes for my stock investments in Europe, but fortunately, my taxes for investments in US-domiciled funds aren't that high - 10% on total returns (dividends + capital gains), this percentage includes the tax that the US government withholds as well as the tax I have to pay in my country of residence. So taxes aren't that big of an issue, although they do play a part when calculating my net returns.

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