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I am saving to buy a house in 5-8 years. This year I invested $40,000 in a prominent ETF which tracks with the S&P 500. So far, I've lost $3,250, that is the stocks are now worth $36,750. I save $1,000 to $2,000 per month. I don't pay commission for the ETF.

My plan was to invest all my savings every month in the ETF; with the understanding that over the course of 5-8 years, any short term loses should be offset by long term gains. However, after losing so much so far and looking at the charts just before the 2001 and 2008 crashes, I'm just wondering if anyone has any insight that may impact this strategy. Should I continue to invest in this fund?

EDIT: The range of 5-8 years is intended to give me the ability to time both the stock market and housing market. That is, if in 5 years the market has done relatively well, and houses aren't too hard to find, I'll buy a house. Whereas if the stock market is low and houses are hard to come by, I'll wait it out a few years.

Thanks for the answers. It's hard to pick one at this point. I will; I just want to make sure I understand the different angles and consider which one seems most applicable to my situation.

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    This forum probably isn't the best place to be getting this type of advice. It will depend a lot on your circumstances to get a good answer. And of course anyone can answer here, so you don't know how good the advice will be. – user32479 Sep 30 '15 at 2:33
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    "anyone can answer here" - reminds me of the cartoon "on the internet, no one knows if you're really a dog". – JoeTaxpayer Sep 30 '15 at 3:03
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    The question you need to ask yourself is; if prices continue to fall and we have another 2001 or 2008, will you be able to sleep at night if your original investment plus additional investments drop to $20,000 or less? – user9822 Oct 1 '15 at 21:34
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    @BruceAlderman, so if you had invested in February 2009 and taken your money out now you would have made approximately 73%. That is 6.5 years, which by coincidence is almost the same value it would have been in February/March 2014, 5 years after your initial investment. So it looks like you've heard wrong. That is why it is important to not start investing when prices are on the way down but when things turn around and start moving back up. Victor's chart below shows exactly when to do that. – user9822 Oct 1 '15 at 21:44
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    @BruceAlderman, you don't need a time machine nor do you need the benefit of hindsight, you just need to be able to read a chart and know what the definitions of an uptrend and downtrend are. Once again look at Victor's chart below and you will see an example of appropriate times to buy and sell. – user9822 Oct 2 '15 at 9:53
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You have a good thing going. One of the luxuries of being invested in an index fund for the long term is that you don't have to sweat the inevitable short term dips in the market.

Instead, look at the opportunity that presents itself on market dips: now your monthly investment is getting in at a lower price.

"Buy low, sell high." "Don't lose money." These are common mantras for long term investment mentality.

5-8 years is plenty of time -- I'd call it "medium-term". As you get closer to your goals (~2-3 years out) you should start slowly moving money out of your index fund and start dollar cost averaging out into cash or short-term bonds (but that's another question).

Keep putting money in, wait, and sell high. If it's not high, wait another year or two to buy the house. A lot of people do the opposite for their entire lives: buying high, panic selling on the dips, then buying again when it goes up. That's bad!

I recommend a search on "dollar cost averaging", which is exactly what you are doing right now with your monthly investments.

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    Ha! A well articulated response, even if it's counter to mine. Maybe. – JoeTaxpayer Sep 29 '15 at 23:57
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    I think we're on the same page, (literally if not figuratively, at least). I think advising OP to sell on the first little dip sets a very bad precedent for a young person starting out. He's doing everything right in my book with a low cost index fund. He has no worst-case scenario -- keep putting money in, wait, sell high. If it's not high, wait another year or two to buy the house. A lot of people do the opposite for their entire lives: buying high, panic selling on the dips, then buying again when it goes up. That sucks! – Rocky Sep 30 '15 at 1:20
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    @Rocky: I think you should include the idea of "wait a couple years to buy the house if necessary" in your answer, because that is a key consideration for this plan. – BrenBarn Sep 30 '15 at 5:57
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    So if the market starts falling further over the next 6 to 12 months how can buying more now be "buying low and selling high", if as history has shown it can take up to 5 years or more for the markets to recover to previous market highs after a market crash. Then there is the opportunity cost whilst the funds are tied up in a falling stock market. If the OP followed this advice the one think that would happen over 5 to 8 years is that the OP would be certain to lose money! – user9722 Sep 30 '15 at 23:44
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    I have done a comparison of DCA vs Timing the Markets over the recent falls from 2007 in my Answer to this Question. Timing the Markets won hands down, and with less trading. What you talk about is based on someone who is buying and selling based on their emotions, what I am talking about is having a Plan and Rules and following that Plan and Rules to make your buy and sell decisions. – Victor Oct 1 '15 at 0:17
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5-8 years is not quite long term.

Until the naughts (the 2001-10 decade), advisors were known to say that the S&P was always positive given a 10 year holding period. Now, we're saying 15 years is always positive looking back. One can easily pull S&P return data which would let you run numbers showing the range of returns for the 5-8 yr period you have in mind. A bit of extra effort and you can include the dollar cost averaging factor. This wouldn't produce a guarantee, but a statistical range of expected returns over your time horizon. Then a decision like "with a 1/4 chance of losing 25% of my money, should I stay with this plan?" This is just an example.

The numbers for 1900-2014 look like this -

enter image description here

In any 5 year period, an average return of 69.2% (note 1.69 means a 69% gain). Of the 111 5 year periods, 14 were negative with the worst being a 46% loss. I maintain 5 years is not really long term, but the risk is relatively low of being in the red.

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    What is the meaning of "isotope" as used in your answer? – BrenBarn Sep 30 '15 at 5:55
  • ? Auto correct kills me. "15 years is always positive" – JoeTaxpayer Sep 30 '15 at 13:46
  • So is it safe to expect return between 0.47 and 2.91(two std from the ave)? – shravan Oct 11 '15 at 6:20
  • 2 Stdev offer a 95% confidence level. – JoeTaxpayer Oct 11 '15 at 11:49
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I would be very cautious about investing any more funds into the S&P500 at this stage. You are quite correct in your observation with the charts regarding the 2001 and 2008 crashes, and below is the chart of the S&P500 over the last 20 years with some indicators on it.

S&P500 20 years

The green line on the price chart is the 100 week Moving Average (MA) and the pink line below the price chart is the Moving Average of the Rate of Change (ROC) Indicator.

In general the market is moving up if price is above the 100 week MA and the ROC is above 0%, and vise-versa the market is moving down if price is below the 100 week MA and the ROK is below 0%.

Both times in 2001 and in 2008 when prices broke below the 100 week MA and then the ROC crossed below the zero line, well we all know what happened next. In 2001 prices kept falling and the ROC didn't cross back above zero for about 2.5 years, in 2008 much the same happened and the ROC didn't cross back above zero for over 20 months.

Now as we are reaching the end of 2015 prices have once again broken below the 100 week MA and the ROC is just above the zero line quickly heading down towards it.

If you have a 5 to 8 year time frame, and prices do continue to fall much further after the ROC crosses below the zero line, your current funds and any new funds you invest in this ETF will potentially see heavy losses for the next one to two years and then take another year to two years or more to recover to current levels. This means that your funds will potentially have no gains at all in 5 or 6 years time.

A better option is to get out of the market once the ROC crosses below zero and then look to get back in once the recovery has started, when the ROC crosses back above the Zero line. You might be out of the market for a year or two, but once you get back in you can expect robust gains over the next 3 to 5 years.

If you do get out and things reverse quite quickly you can easily just get back in. In mid-2010 and mid-2011 the price broke below the 100 week MA but the ROC remained above Zero and prices continued moving up after short corrections. In mid-2012 the ROC got very close to the Zero line but did not cross below it, and again prices continued to go up after a small correction. You should plan for the worst and be ready if it occurs. If you don't plan you're just hoping and hoping is what will keep you awake at night whist things are going against you.

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    Another downvote by someone who has a bias against TA. I have demonstrated a simple alternative to DCA with much better returns than DCA, and it will help you sleep better at night when the markets are in free-fall. Please if anyone has demonstrable proof that DCA will produce better returns than this simple method above, please provide it, or else please don't downvote a concept just because you don't understand it. My proof is in my Answer to this Question. – Victor Oct 1 '15 at 1:01
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    One reason I am skeptical of this is: why 100-week MA? Why not 10, 20, 50, 98, 99, 101, 102, 103, 125, or 200? I agree that you have a systematic approach, but it is not at all clear to me that there is a conceptual basis for distinguishing it from a large number of very similar alternatives. (I didn't downvote, by the way.) – BrenBarn Oct 1 '15 at 1:51
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    @BrenBarn - the longer your time frame the longer the MA you should use. The 100 week MA suits a medium to long term outlook, it provides early enough signal to get in or out before the market has moved too much in the opposite direction whilst keeping you in or out of the market if the reversal is only small. In other words it stops you from being whipsawed in and out of the market too often. The ROC also provides further confirmation of possible large reversals. Both should be back-tested and forward-tested to avoid curve fitting, which I have done both considerably. – Victor Oct 1 '15 at 2:02
  • @Victor, here you have a 100-week MA, and in the analysis of the method, you have 100-day MA. Why is that? Which one would be used in what case? – matewilk Sep 9 '18 at 13:43
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Your 5-8 year time frame is interesting because it is actually a two windows.

When people are savings for retirement, they tell us how many years or decades they have until they reach retirement age. But they also imply that they are planning on spending decades withdrawing the money.

But you wanting the money for a house in 5-8 years are needing the money more like somebody who is saving college money for a teenager. In fact your plan is similar in time frame as a 13 year old has for their college fund; start in 5 years but only have a 4 year spending window.

Take the California 529 program:

Beneficiary Age 13-14:

    25.20% US Equity
    12.00% International
    02.80% Real Estate
    60.00% Fixed income

Beneficiary Age 18+:

    09.46% US Equity
    04.50% International
    01.05% Real Estate
    35.00% Fixed income 
    50.00% Funding Agreement

The funding agreement provides a minimum guaranteed rate of return on the >amounts allocated to it by the Investment Portfolio. The minimum effective >annual interest rate will be neither less than 1% nor greater than 3% at >any time.

So you plan of investing 100% in the S&P with your window is way too risky. You should only invest a portion of your down payment in equities, and be prepared to only be in that mode for a few years. Any drop in the market now hurts you, but one just before you need the funds would be devastating.

  • Not quite. When my kid goes off to college, I need to make 8 withdrawals over 4 years, but a house downpayment is the one withdrawal. The 5-8 swing should be clarified by the OP. If the market is at a relative high in year 5, will he buy, or at least allocate more conservative? Or at relative low, just wait it out and buy after a recovery? – JoeTaxpayer Sep 30 '15 at 21:30
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Cycle analysis indicates that the current bear market, which began in May/June, should last until late 2016 / early 2017. So if you want to trade the short side, then it's a great time to be short for the next 15-18 months.

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    +1, This could be a viable option depending on how aggressive one is, as there are Bear ETFs available for precisely when the market is down-trending. – Victor Oct 1 '15 at 1:14
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You shouldn't.

The Dow has gained 7% annually on average since October 1915(inflation-adjusted).

It has also lost 73% of its inflation-adjusted value from 1966 to 1982 meaning that it would have lost you 4.5% annually for 16 years.

Furthermore, past performance is not indicative of future results.

If stock markets keep performing like they have for the past 100 years, you can expect there will be a point within the next 60-or-so years your stocks will be higher in value than they were when you bought them.

With funds you are paying the people managing them which means you are guaranteed to have pyramiding losses that your gains will have to offset.

In your case, you are betting with no fundamental knowledge that S&P will be higher than now whenever you need the money which is not even supported by the above assumption.

Dollar averaging just means you will be placing many bets which will reduce your expected losses(and your expected gains) when compared to just buying $100K worth of S&P right now.

Whatever you invest in, and whatever your time-frame, don't gamble. If you can't say this company(ies) will be $X more valuable than now in X months with probability > Y, then you shouldn't be investing in it. Nobody ever made money by losing money.

There are also safer investments than the stock market, like treasury bonds, even if the returns are lousy.

  • The S&P, inflation-adjusted, lost 1% from Jan 1 '66 - Dec 31 '82. The whole period, not per year. I don't have such easy access to dow data, but I suspect you are ignoring dividends. And the fact that dollar cost averaging made that period positive. – JoeTaxpayer Sep 30 '15 at 13:05
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    -1. He's only down 3 grand so far. Let him martingale his savings away all the way down from the top. Fund managers have to eat too. – gengren Sep 30 '15 at 15:50
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    One of the mod powers I try to use for good is the ability to edit a comment, either for bad typo, or to inject a link. In this case, to a definition of martingale, which was a new word to me. – JoeTaxpayer Sep 30 '15 at 21:35
  • I hadn't seen martingale verbed before. – stannius Oct 5 '15 at 20:12

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