Ask the Spud: Should I Buy In Now?

I’ve just inherited a six-figure sum and am interested in investing using the Couch Potato approach. What is your opinion on entering the market now, given it’s at a record high? — C.T.

This is the most common question I hear these days. It took almost four years for investors to finally admit we’re in a charging bull market—US markets are up more than 150% since March 2009—but most of the chatter now seems to be about a looming  correction. This week, one noisemaker even came up with 21 stock market warning signs giving global investors cold sweats. Hard to believe he could only come up with 21.

Even if the media weren’t shouting like this, investing a six-figure lump sum would still be difficult. That’s especially true with an inheritance, since it often takes a while for beneficiaries to feel like that money really belongs to them. But in general—assuming you’ve done a careful risk assessment and have a target asset allocation in mind—it’s usually best to invest the money immediately. Here’s why:

Not everything is at an all-time high. While US markets have been on fire recently, Canadian equities are nowhere near the peak they reached in 2008. International equity ETFs (both developed and emerging markets) are priced lower than they were in 2007.  And when equities do suffer a correction, bonds will likely offset some of those losses, becoming expensive as they do so. That’s the nature of a diversified portfolio: it’s unlikely your timing will ever be good or bad across all asset classes.

A pullback is coming—but we have no idea when. The danger of waiting for a pullback in the markets is simple: it can take a very long time. The Wall Street Journal reported recently that “there have been 35 periods where the S&P 500 went longer than 165 days without a 5% decline.” We’re in one of those six-month stretches now, and US markets are up more than 20% over that period. If you’ve been sitting on the sidelines for months—and people have been worried since at least the beginning of the year—the opportunity cost was enormous.

It’s not just stock markets that are impossible to time: let’s remember the widely predicted interest rate hikes that were supposed to kill bonds (the DEX Universe Bond Index is up 5.6% over the last 12 months, and 6.5% annually over the last three years) and the housing crash that’s been looming forever, though prices continue to rise. Forecasts are usually wrong, period.

When the correction comes, you won’t want to buy. Investors often talk about how a sharp decline in prices is a “buying opportunity.” But they should ask themselves whether they really have a track record of buying after pull-backs.

When the S&P/TSX 60 plummeted almost 20% between March and September 2011, did you enthusiastically load up on more? During the prolonged debt crisis in Europe, were you topping up your EAFE fund? Or were you “waiting for things to settle down”? It’s easy to talk about buying low, but it’s much harder to actually do it.

Once you’re fully invested, then what? Let’s look at this question from a different perspective. Instead of having received a big inheritance recently, let’s say it arrived several years ago and you used it to build a Couch Potato portfolio with a mix 60% stocks and 40% bonds. You’ve been rebalancing regularly, so your portfolio is right on target today. Would you sell everything and go to cash now because markets are at an all-time high? If the answer is no, why would you prefer to keep your inheritance in cash today rather than investing it?

There’s no question that your entry point will have a significant effect on your portfolio’s long-term performance—especially of you don’t plan to continue adding money. Unfortunately, there simply is no way of determining the “right time” to enter the markets except in hindsight.

49 Responses to Ask the Spud: Should I Buy In Now?

  1. jungle May 28, 2013 at 9:31 am #

    Excellent article again, thank you for your advice. Good way to put it. I also like the part of how investors are not likely to buy when markets are down, beacuse they are waiting for things to get better. (or a better entry point, that may not happen or time correctly)

    Another option I would consider, I would write a plan to DCA invest the sum bi-weekly over a 12 month period and stick to the plan.

  2. Raman May 28, 2013 at 9:37 am #

    I’ve been struggling with the same problem for some time — I’m considering selling my house and renting (for a variety of reasons), and investing the proceeds of the sale. I was having difficulty deciding if I would be comfortable buying ~$300k worth of equity and bonds, when all of my recent transactions have never been larger than $10k.

    Thanks for the illuminating article!

  3. soso May 28, 2013 at 9:38 am #

    What a good timing for this article! I have been under invested for the last 2 months (I had about 30% of my portfolio in a 1.25 % interest mutual fund). Last week, I rebalanced my portfolio but, as of this morning, I still have 8% not invested in US$. That’s it, after reading this article, I am going full in following my portfolio allocations. I will frequently rebalance for the next little bit.

    It is definitely nerve racking (and obviously highly inefficient) to try to time the market. But it is also very hard to fight the fears of a pull back. I hope I have learned my lesson once a for all (but I would not guarantee it)!

  4. CD May 28, 2013 at 12:26 pm #

    I’m waiting on the fence myself.

    But, I love it when things go down. I don’t have the hesitation for buying on a decline since I don’t buy with my entire reserves on one go and multiple purchases will still reduce the average purchase price.

    Can this growth really be based on true valuations or just borrowed money?

  5. Value Indexer May 28, 2013 at 1:21 pm #

    Great points, Dan! I look at it as an asset allocation decision, and going 100% cash with a large amount that’s important to you is very dangerous. If the amount put me significantly closer to financial independence I would use more cash or short-term bonds, but I would still have a lot in stocks.

    If you wait for a 5% correction, that’s only meaningful if the market didn’t rise 7% before then. I did some research recently and didn’t take long to find an example of a “one-time price” – the market rose to that price and then never fell back to that level (apart from a few days later in that year). I’m sure there have been many others.

    So if you want to read media reports about how the market is about to crash, you should balance that view with the possibility that we will never see today’s prices again. Overall I’m finding that the tone in the media today is all about how the market can’t possibly stay this high given everything that is happening today. Interestingly, that was also the prevailing view in March 2009.

    All that said, I fully encourage people to “wait a bit longer and see”. If prices keep rising until they really feel like they’ve missed the boat and they have to jump in before it’s too late, they’ll give the market another good boost into true bubble territory so I can rebalance into bonds (which will hopefully be cheaper by then).

  6. Brunnenburg May 28, 2013 at 1:31 pm #

    Excellent and timely article. The biggest mistake I did this year was waiting in the sidelines for a correction that never came. I did go all in large last year with the Europe debacle, but have missed out significantly this year. The day after I loaded up on VTI, VEA and BND in my US$ RRSPs last week the Nikkei index crashed 7%. VEA went down 2.5% the next day and VTI 1.5%. Had I been the immature investor I used to be I would have been recriminating myself to no end. But thanks to my BND allocation (40%), the swing was minimal and after all purely psychological, as I’m in it for the long haul.

    Moral of the story: don’t wait to buy, diversify, re-balance as needed.

  7. HarveyM May 28, 2013 at 1:49 pm #

    The difficulty, I think, is in the wording in the question. “Buying” is a word with too much personal baggage. We have all bought cars or houses we have regretted hence buying is experientially too emotionally laden a word for us. But investing is different. It is based on science, on modern portfolio theory (MPT), and asset allocation which takes out the emotion. So, should I invest now? Of course, as always determine an individual asset allocation based on MPT, rebalance annually, and sit back for the long term and enjoy life. Investing is simple and easy when you take out the emotion and trust the science and a good advisor like Dan :).

  8. Tom May 28, 2013 at 2:02 pm #

    Dan, I’m surprised that your advice is to go all in immediately. Doesn’t it provide more diversification (across time) to average in to the market over a few weeks or months? Given the size of the sum to be invested, the reduced risk should outweigh the extra commissions.

  9. Tim May 28, 2013 at 2:44 pm #

    There was some interesting discussion of lump sum versus gradual dollar cost averaging on the Canadian Money forum, sparked by a paper that showed lump sum had better results (by a small amount) in about 70 percent of cases: http://canadianmoneyforum.com/showthread.php/8973-DCA-vs-Lump-Sum

  10. Canadian Couch Potato May 28, 2013 at 3:03 pm #

    @Tom: I have no issue with DCA if people are so nervous they just can’t bring themselves to invest a lump sum. But as Tim points out, DCA usually results in lower returns, so you should understand that going in. I’ve written about this before:
    http://www.thestar.com/business/personal_finance/2011/04/17/why_a_lump_sum_investment_beats_a_little_every_month.html

  11. J A H May 28, 2013 at 3:34 pm #

    Another variation of how to look at this is to consider the large windfall as a personally-managed retirement fund. Whatever the source, you didn’t have the money previously. Any time can be as good as any to get the funds set up to take care of you long term.

    I’ll add from personal experience I wish I had been faster to get a larger sum invested all at once. Hindsight revealed that DCA was only for managing short term stress, and not long term returns.

  12. CD May 28, 2013 at 4:25 pm #

    @CCP,

    Can we have the Couch Potato models recalculated for mid-year to show what holding back since Jan/2013 looks like?

    I have been holding back since then and I would like to see my foolishness calculated!

  13. John May 28, 2013 at 5:37 pm #

    Further food for thought on lump sum vs DCA historically:

    http://www.efficientfrontier.com/ef/997/dca.htm

  14. Death and Taxes May 29, 2013 at 5:49 am #

    I am all in!
    I am putting 4k/month in, my balancing strategy consists of ” ok this month I’m at 32% bonds so I bump that up to 40%” if when I Go to invest I find I am at 52% bonds I invest in equities with the philosophy of not having more than 10% in any one sector.

  15. Dale@Streetwise May 29, 2013 at 8:10 am #

    Averaging in can reduce short term “losses” in a down market cycle. It can also boost returns in that down market, and subsequent recovery. This article includes a hypothetical averaging in scenario – with returns by year. Averaging in can take you to positive returns much sooner, once the markets begin to recover.

    http://seekingalpha.com/article/1313951-averaging-in-to-a-market-top

  16. Canadian Couch Potato May 29, 2013 at 8:49 am #

    @CD: You can check year-to-date performance on each fund’s website. Canadian stocks are up only about 3% and international stocks about 5%, but the US is up about 17%.

  17. Gordon May 29, 2013 at 11:28 am #

    Wandering how is DEX Universe Bond Index return calculated. It is 5.6% in last 12 months , however looking at the XBB chart for the last year it shows that share value is down approximately 1 % over the same period.

  18. Canadian Couch Potato May 29, 2013 at 11:48 am #

    @Gordon: Unless interest rates decline, a bond fund’s price will gradually fall over time. However, this decline will be offset by the interest payments from the bonds, which are not included in charts like Google Finance. I think this still confuses a lot of investors who watch the price go down in their brokerage account and mistakenly believe they’re getting negative returns.

    According to the iShares website, the total return on XBB over the 12 months ending April 30 was 5.26%. (The index return was 5.60%.) Given that the fund’s coupon is less than 4%, there would have been a small price bump over this period as well.

  19. Gordon May 29, 2013 at 1:52 pm #

    Hmm I am still a bit confused. Weighted Average Yield to Maturity is 2.3 %, fund price decreased about 1% in last 12 months….how does that add up to gain of 5.6%??

  20. Canadian Couch Potato May 29, 2013 at 2:18 pm #

    @Gordon: You need to look at the weighted average coupon, not the YTM. And you need to make sure we’re talking about the same 12 months. I was not including May, because the month-end numbers are not posted on the web site yet.

  21. Andrew May 29, 2013 at 5:24 pm #

    With a lump sum I would consider using value averaging over a year or even two.
    http://en.wikipedia.org/wiki/Value_averaging

  22. Nathan May 29, 2013 at 5:33 pm #

    This is the most intuitive argument in my mind: “Would you sell everything and go to cash now because markets are at an all-time high? If the answer is no, why would you prefer to keep your inheritance in cash today rather than investing it?”

    Aside from trading costs, there is no difference between 1) selling $100k of an existing $500k portfolio and 2) choosing not to immediately invest a new $100k to an existing $400k portfolio. If you wouldn’t cash out a large chunk of your portfolio today, why would you avoid lump-sum investing a new chunk? It’s the same thing! The only difference is if the windfall drastically changes the size of your portfolio, but even then the solution isn’t to add it slowly, it’s to adjust your target asset allocation appropriately.

  23. Canadian Couch Potato May 29, 2013 at 6:02 pm #

    @Andrew: Value averaging is pretty controversial. I tend to agree with Michael James’s opinion of it:
    http://www.michaeljamesonmoney.com/2012/10/value-averaging-doesnt-work.html
    http://www.michaeljamesonmoney.com/2013/03/value-averaging-nonsense.html
    http://www.michaeljamesonmoney.com/2013/03/value-averaging-experiments.html

    @Nathan: Glad you picked up on that. It’s surprising how many people don’t appreciate there’s no difference between not investing idle cash and selling your current investments (other than trading costs and taxes, which could be negligible).

    It’s like those recommendations to “hold” a stock rather than to buy or sell it. It makes no sense except in terms of transaction costs, taxes or liquidity, and that’s not what the recommendations are ever based on.

  24. HarveyM May 29, 2013 at 9:12 pm #

    Steven Visscher, on the Mawer Blog (http://www.mawer.com/knowledge-centre/mawer-blog/walking-the-high-wire/) asks a similar question: should we sell now and take our big profits? Are the US equity indices artificial high due to QEsss? Short answer: no! Many companies are fairly valued says Vissher. The US market is not overvalued and investing now is reasonable:
    “This focus on future cash flow or future earnings (a more common metric reported in the media) is strangely absent from much of the current coverage on the record-breaking index levels. For example, the S&P 500 has recently surpassed its value during the market peak in 2000. At that time, the 500 companies in the S&P 500 were trading at about 25 times future earnings. Today, that ratio is closer to 15. Put another way, the current value of these 500 companies is about the same as the value in 2000, but these companies are now generating earnings that are approximately 66% higher.”

  25. Andrew May 30, 2013 at 1:19 pm #

    Dan thanks for the heads up on value averaging.
    I learned about from one of William Bernsteins books. He recommended value averaging into index funds for lump sums.

    I understand the criticism in the links you posted but here is another take:
    If the strategy or another such as DCA means overcoming psychological hurdles to becoming invested versus not being invested ( for a lump sum I mean) then I think it could have value because it increases time in the market. I speak from anecdotal observation – a friend inherited the proceeds of a family cottage sale years ago and scared by the financial crisis has been earning just over 1 % in a HISA with negative real returns after tax and inflation. His father was a child of the depression and ingrained the idea that stock investing was too risky. If he felt more confident about investing it through an incremental process such as DCA or VA then he would have been better off.

    For the same reasoning I would recommend a decent balanced mutual fund such as Mawer Balanced with a 1% fee over a DIY passive portfolio if it meant being exposed to riskier asset classes rather than doing nothing with one’s savings.

  26. Pacific May 30, 2013 at 6:14 pm #

    No one can predict the future.

  27. Passive Investor May 30, 2013 at 11:49 pm #

    @ Couch @ Andrew Just wanted to add my view on the DCA / VCA debate. Although there are similarities between the two, by my understanding a main difference is in the aims of the (slightly different) techniques. From memory the original VCA book was about maximising the growth rate of the invested money over the long-term. When I originally read the book I thought the analysis failed to take into account the opportunity cost of not being invested.

    DCA a lump sum is more of a short-term insurance policy against a big market fall shortly after investing a significant lump sum (see efficient frontier link in the thread). It is helpful in my view because of the asymmetric risk of a large downfall (rare but potentially devastating) vs the lost returns from investing gradually over a year say. Because the market goes up over the long term clearly 100 investors who DCA over a year (starting at different times) will on average do worse than 100 investors who fully invest (using the same 100 starting times). But a handful of the 100 fully invested group will do significantly worse than average and significantly worse than any of the DCAveragers.

    For regular savers there is a separate advantage of DCA which is as a discipline against market timing which (for me at least) is very difficult indeed to avoid. I think of it as a kind of way of saving myself from poor investment timing decisions.

    Thanks for a good post and interesting thread

  28. Nathan May 31, 2013 at 1:28 am #

    @Andrew: All certainly good points. Of course it’s also important that someone isn’t coaxed into taking on more risk than their comfort level can handle, since cashing out after the market drops is the worst possible outcome. So the root cause of that anxiety does probably need to be addressed regardless. Still, I agree that in some cases DCA or VA could be useful to get over the final mental hurdle if necessary.

  29. john June 30, 2013 at 8:08 am #

    Excellent article, as usual.

    Two comments: 1. We often hear that “market timing” is a NO–NO. But I’ve always felt that “market timing” is, in fact, unavoidable and inherent in any and every investment decision, no matter how benign. The only NON-market-timing investment scenario I can think of is the investor who only purchases GICs. But even THAT decision implies a bit of “market timing”, because you are forced to chose between long term and short term GICs.

    2. If you accept that “market-timing” is implied in ALL investing, the question really becomes: what KIND and HOW MUCH? Right now the issues seem to be: “Where are interest rates headed and how quickly?” Corollary: “how much weight in bonds, and what type and duration?”

    My own view is that long term secular market trends, although not definitive (what is?) are still quite useful: “regression-to-trend,” “Q-ratio”, “forward-looking 10-15 year S&P dividend averages” etc., etc.

  30. john September 1, 2013 at 5:02 pm #

    An excellent question, and an excellent answer at CP, as usual. Risk tolerance, age, income, etc., etc., are as always very, very relevant. But let me go out on a limb and suggest that the “current environment” (Sept 1, 2013) makes me uneasy. If I could afford to “sit on the sidelines” (trans., short term bond ladder or GIC) I would. Not everyone has that luxury. It is impossible to “time” the market, but having said that, there isn’t one sane advisor (read NOT stock promoter, NOT wealth management advisor) who would advise anyone to go all in right now. There are business cycles–that’s in any securities text–and whether or not you believe in “reversion to mean” etc., etc., one must take them very seriously.

  31. Richard September 1, 2013 at 5:19 pm #

    John, there are indeed a few reasons to be cautious (in fact it’s rare that that isn’t the case). As long as enough investors have enough respect for the risks of the market, they are less likely to materialize. When the vast majority of investors completely abandon all caution that’s when I want to get out of the market as fast as possible.

  32. Canadian Couch Potato September 1, 2013 at 6:18 pm #

    @John: I’d suggest your argument is contradictory. You say it’s “impossible to time the market,” but then you say you should not be “all in” and that you need to take business cycles seriously. But adjusting your exposure to the market based on economic conditions is, by definition, market timing.

    As for the sanity of advisors, it really depends what you mean by being “all in.” Prudent investors have a target asset allocation, and they maintain it all times, using market cycles only as an opportunity to rebalance. No one is denying the existence of business cycles. The problem is the turning points can never be foretasted with reliable accuracy. Sane advisors should be encouraging investors to focus on the long term and ignore the short-term volatility.

  33. john September 1, 2013 at 10:54 pm #

    Re timing: point taken! I think it would have been helpful for me to say that people can mean quite different things by “market timing.” In one sense it means “being able to predict market gyrations over the short term,” which I think is impossible. In another (more cogent or useful sense) it just means, as you say, “adjusting exposure to the market based on economic conditions,” which (seems to me) a more plausible or at least useful sense of the term.

  34. Canadian Couch Potato September 1, 2013 at 11:54 pm #

    @john: It sounds plausible and useful until you try to execute. Remember the European debt crisis that had everyone “adjusting their exposure”? EAFE stocks are up over 9% annually over the last 3 years, while Canada is up less than 5% annually. How about the rising interest rates that were “inevitable” since 2009? It took four years for that to happen, and all the people who avoided bonds missed above-average returns. Many more examples where those came from:

    http://canadiancouchpotato.com/2012/12/20/a-market-forecasters-report-card/
    http://canadiancouchpotato.com/2012/01/30/market-forecasts-prove-worthless-again/
    http://canadiancouchpotato.com/2012/12/28/what-investors-can-learn-from-weather-forecasts/

  35. Richard September 2, 2013 at 12:54 am #

    @Dan: to give a more specific example, last spring the fear of European stocks was particularly intense so I made the EAFE index the largest asset class in my portfolio. In the following 12 months I observed a return in CAD terms of 30% while many people were probably expecting -30%.

  36. HeidiPG November 29, 2013 at 1:53 am #

    Here I sit, with about $125k coming from my Dad’s estate in mid December and I know I will be investing it in a new portfolio, couch potato style. I had that momentary thought – oh dear, the markets are still up! Oh well, I was in the same place in early 2008 when I received money from Mom’s estate and it was a bit ugly for a good while, but I stuck with it by topping up our RRSPs. This money will go to create a new source of income and I look forward to making it happen – potato is my style.

  37. john grant November 29, 2013 at 7:24 am #

    I don’t envy you in the slightest, with markets now downright “frothy”-looking compared to where they were when this thread started *which wasn’t that long ago! Depending on your age, risk-tolerance, etc., you may be able to afford to go very conservative for a month or two, just to see how this “historic” stock market pans out.

  38. Mr.Saver January 23, 2014 at 5:28 pm #

    Dan Hope you still reading these!
    i just woke up month ago and have done lot of reading, suggested by you and other blogs.
    i have $100k, which i earned from sale of my house last year.
    I want to top up my tfsa (currently just $8k)+ want to open wife’s tfsa (total contribution 2008-now)
    That makes us about 50k in tfsa alone. Question is what do i do?? 🙂
    suggested couch portfolios at TDe? or others? i read on your recent best stocks for 2014 issue TD portal is rated way below BMO and others or it doesn’t matter to people like me who just want start?Thanks.

  39. Canadian Couch Potato January 23, 2014 at 6:39 pm #

    @Mr. Saver: Unfortunately I can’t possibly make any specific suggestions, since I don’t know anything about your situation. Start by thinking carefully about what this money will be for (long-term retirement savings or to buy another house in a few years?) and use that knowledge to determine the appropriate amount of risk.

  40. Mr.Saver January 23, 2014 at 6:49 pm #

    Dan, thank you for response. it was quick!
    Basically i want some income from these, i wont be in need of this money in near future (should never say that!)but this is not my retirement money. i m trying to make correct decision as far as allocations and which portal or provider i use.I definitely want to do it myself. I bought house after i sold one last year, i intentionally did not pay more than 20% for house and kept it to start my investment journey.

  41. smn February 1, 2014 at 3:59 pm #

    Hi ccp. Speaking of going all in… I’m curious as to why CLF (MER of 18%) didnt make your list for recommended etfs for short term government bonds. Am I missing something?

  42. Canadian Couch Potato February 1, 2014 at 4:17 pm #

    @smn: As explained on the Recommended ETF page: “The list is not comprehensive: experienced investors may make different choices, especially if they want to follow non-traditional strategies or have specific tax considerations.”

  43. Michael November 1, 2015 at 9:21 pm #

    Hi Dan, I am new to investment, so please bare with me.

    I know after reading this article, I probably should not ask the same question again. but, I have a large sum of money (six-figure) I want to invest using CPP 2015 model portfolio, I am in my 40s, the money is for retirement. with the stock market at all time high now (Nov 2015), should I still put everything in based on the portfolio all at once, or maybe I put the money in a bond ETF first and set up a plan to invest on a quarterly base?

    Thanks.

  44. Canadian Couch Potato November 2, 2015 at 4:06 pm #

    @Michael: I’m afraid I don’t have any different advice that what it already in this blog post. Trying to time the market is futile, and let’s remember that Canadian and emerging markets are not at all-time highs: not even close. Moving into the market a little at a time (dollar-cost averaging) is fine if it makes you more likely to invest rather than sitting on the sidelines. But make sure you have a plan to invest fixed amounts at regular intervals. Don’t try to wait until it “feels right.” It will never feel right. 🙂

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