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I think index funds are one of the best investment tools for the defensive investor. Still, when should one start investing money in an index fund? It could result in a loss to get in at the top of a bull market (of the index in question).

Therefore, would it be preferable to:

  • wait for a bear market to occur?
  • start anytime, with fixed amount each month? i.e. dollar cost averaging?
  • another approach?
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First: what's your risk tolerance? How long is your investment going to last? If it's a short-term investment (a few years) and you expect to break even (or better) then your risk tolerance is low. You should not invest much money in stocks, even index funds and "defensive" stocks.

If, however, you're looking for a long-term investment which you will put money into continually over the next 30 years, the amount of stock you purchase at any given time is pretty small, so the money you might lose by timing the market wrong will also be rather small.

Also, you probably do a remarkably poor job of knowing when to buy stocks. If you actually knew how to time the market to materially improve your risk-adjusted returns, you've missed your calling; you should be making six figures or more on Wall Street. :)

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    I'm not interested in working on Wall Street. I am learning through few books in order to pick stocks by myself in a near future. In the meanwhile, I was also interested in putting some money into index funds for very long terms. I just did not see any comments about its timing in my books so here is my question. Thank you.
    – oldergod
    Commented Jan 20, 2014 at 1:28
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The fact that you are choosing index fund means you are surely not one of those investors who can correctly judge dips. But buying on dips is still important. You can use a method called Dollar Value Averaging. It is better than Dollar Cost Averaging. Just make sure you apply a lower limit and an upper limit to be more predictable. Suppose you have 10000 to invest. Use limits like minimum 200 investment when index is high, maximum 600 investment when index is down and when index gives normal returns, invest 400. Do this for about 2 years. More than 2 years is not recommended. I myself use this method and benefit a lot.

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  • even more simple approach if you do not have enough patience to calculate. Just do DCA with 400 per month and whenever u see a dip, just add some more for that month.
    – Mohan Pednekar
    Commented Jan 16, 2014 at 19:26

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