Is now a good time to invest in the stock market?

Sorry, dude wrote:

Sorry, but I'll take Flagpole's advice over yours any day.

Bigfoot Investments wrote:

Indeed, it is not. It is the most sensible of investment advice, though one that many find difficult to grasp.

The only meaningful definitions for "relatively cheap" or "expensive" are "likely to lead to above average market returns" and "likely to lead to below average market returns". Otherwise talking about market P/Es or P/Bs or P/Xs is simply a cute exercise in irrelevancy.

Why do you care if the market P/E is at some historical high/low? Assuming that you care about your money I would posit that the reason is because you care about what this will mean for your future returns. And so we are back to my definition - "will we be seeing above/below average market returns in the near future?" Since at all times I do not know the answer to this question, it follows that at all times investing in the market is equally good/bad.

Now, if I may expand upon this just a bit, what matters is whether or not the market is the best investment vehicle to meet your financial objectives. For many people with a long term time horizon and the stomach to handle the ups and downs the answer is 'yes'. Nobody, including you, has the ability to time the market sufficiently well to overcome the transaction costs associated with said timing and, more importantly, losing out on the general upward direction of the market by being out at times when you consider the market to be "expensive". This is a simple fact that has been proven to any reasonable observer's satisfaction in innumerable studies. Start with "A Random Walk" if you wish to understand beyond the emotional story telling that passes for wisdom among the Wall Street in crowd.

Now, out of respect to agip (for whom I have a great deal of respect), I address the questions:

"How do you take valuation into account when putting new money to work?"

The most important part of the answer is - "EXACTLY the same way that I take valuation into account when leaving old money to work". A remarkably high percentage of amateur and professional investors draw a distinction between "new money" and "old money" (I am not saying that you are one of them). Money is money. There is no red money vs yellow money. It is all the same. If you think that "new money" should not be invested today then you must also think that "old money" should be taken out of the market today. (of course this ignores transaction costs but that is really the tail and not the dog so I will do so for the moment).

To complete the answer - I do not take overall market valuation into account when putting new money to work (nor when leaving old money to continue to work).

"Now valuations are fairly neutral so they don't matter - but if PEs were 25...would you still recommend putting 100% of you money in on day one?"

I have gone through the fallacy of dollar cost averaging more times than I care to recount on these pages so I will not repeat myself here. Suffice it to say that one needs to wrap one's mind around two simple concepts if one is to invest rationally.

1) There is no difference between new money and old money.

2) It is not the date when one puts money into the market that matters but rather ALL of the dates while your money is in the market.

This second fact is the one that more people find so difficult to grasp. But once one truly understands the ramifications of this questions about "is now a good time to invest?" or "should I gradually put money into the market or all at once?" are immediately seen to be nonsensical.

agip wrote:

Why do you care if the market P/E is at some historical high/low? Assuming that you care about your money I would posit that the reason is because you care about what this will mean for your future returns. And so we are back to my definition - "will we be seeing above/below average market returns in the near future?" Since at all times I do not know the answer to this question, it follows that at all times investing in the market is equally good/bad.

One thing I would add tho is that if you take out the 'near' in your sentence...then I think it is pretty established that longer term returns will be better when you buy at low valuations.

Near term - no predicting based on valuation. But once you get 4,5,6 years out, buying at low valuations will usually provide higher returns than buying at high valuations.

Time to invest? wrote:

Flagpole wrote:

I'm not a big fan of putting chunks of money into the market (even though I do it once in a great while if the market has really tanked).

If you have $6,000 sitting around, I would ask yourself these questions:

1) Are you debt free other than a mortgage (or MAYBE a HUGE student loan)? If so, use that money to pay off debt.

2) Do you have an emergency fund of 3 months of expenses? If not, perhaps that is all or part of your emergency fund.

3) Are you putting enough into your 401k? If you're not doing 15%, then I would consider upping your contribution...you don't have to go all the way to 15% if yo are only doing 8%, but maybe bump it to 12% and wait to increase until you make more money. I would hold on to this $6,000 while you up your 401k contribution just to make sure you can handle it.

4) Do you have an IRA? If not, consider opening one with this money.

5) Do you anticipate a big purchase in the next few months? For example, if your car is on its last legs, perhaps you can drive it long enough to save up another $4,000 and just buy a $10,000 car (used) for cash. It is great not having car payments.

If your world is great in all ways...you are debt free, you have an IRA and 401k and are contributing 15% or more of your salary to both, you have a separate Emergency Fund and you have no large purchases anticipated, and you want to invest that money, then I would consider either putting it in a non-retirement mutual fund (you'll LIKELY get a bigger return than in that Money Market account), or research and buy a "basket" of no fewer than 5 stocks. Those stocks should all be in different sectors of the market. Personally I wouldn't do the individual stock thing unless you are debt free AND are doing 15% into retirement accounts AND own a home outright though.

Good luck.

1) No.

2) No.

3) 401K is maxed out.

4) No.

5) No.