A reader emailed me in the weekend after Brexit and asked me what I did and what she should do. I told her I bought more shares in an international stock index fund even though I knew the price wasn’t going to be the lowest. On the other hand, I told her she should probably just stay put.
I was right about the price not being the lowest. The market dropped some more on the following Monday. If I had waited until Monday, the same number of shares would’ve cost about $1,000 less. My buying one day too soon caused me to overpay by $1,000, just like that, when normally people would go an extra mile to save $50.
How did I know the price wasn’t going to be the lowest? Because when markets fluctuate, it’s very difficult to hit the lowest. Except by sheer luck, it’s next to impossible the price that I buy at happens to be the lowest.
Why buy then when you know the price isn’t going to be the lowest? Wouldn’t it be better to buy at a lower price? It would be if you actually buy at a lower price. It’s just that you also don’t know how much lower it’s going to go. If you waited for a lower price, and after actually seeing the lower price, you waited some more, hoping it would go lower yet, the price may turn back up and pass the original point. Your waiting would then make you come back empty handed or give up and pay a higher price than you originally would.
It’s better to make it mechanical. When it’s time to buy, just buy, even if you know the price isn’t going to be the lowest.
Stock prices made a quick turn this time. The selloff only lasted two days. Three weeks later the same number shares in that international stock index fund are worth $3,000 more.
Why then did I tell the reader to just stay put, as opposed to buying, as I did myself? Because I didn’t know what would happen. The prices could’ve gone down, and down, and down. While I would be OK with that outcome I didn’t know what the reader would feel. Most people get upset when they see their new money loses value. They actually get more upset from a small loss on new money than they are from a much larger loss on their old money (see previous post Old Money Versus New Money). I didn’t want this reader to get upset.
The market will always fluctuate. When you see a price good enough, just buy. If the market goes lower, buy again. Don’t hold off trying to swoop in at the bottom. When the bottom comes, you can’t tell, and you won’t be able to swoop in.
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so true. I love your point about new money and old money. I never realized it before but I am totally guilty of the same behavior. Just recently, I observed how obsessed I have been about monitoring my investment in a new asset in which I hold a relatively small amount. I was fretting about a very small (unrealized) loss in this recently allocated fund, when I realized my sizeable share of VTSAX has been up hugely this year thanks to buying lots of shares in Feb (BEFORE it hit bottom, but close enough ;). It was as if I totally forgot about it and it outweighs my new money by 10-fold
reminds me of an old rule (maybe from Nick Murray?) that I have tried to follow…
“The time to invest is when you have cash to invest. The time to liquidate is when you need cash.”
When Brexit happened, I had about $40,000 in new money that had accumulated in my taxable account. $25K I deposited in May after being tempted by an offer from ETrade to give me $200 and discounted trades for 6 months if I deposited $25K. The $25K came from regular monthly saving, the other $15K was mostly incentive comp that was paid out in Q1. I had been waiting for a compelling price to buy an index fund. When Brexit hit I bought in 4 increments of about $10K on Friday and on Monday. Those are currently up 5%, 5.3%, 7.9% and 8.4%. Some thoughts:
1) Your point about new money is right on — I have watched these purchases more closely than the rest of my portfolio.
2) I didn’t tell any friends or family to do what I was doing — same reason, I didn’t know if I was right. (Still don’t)
3) I had bought this index at similar prices in the past and I thought the price was fair, not so high I would regret it.
4) Fluctuation can be a good thing if you are an accumulator — all I do is buy and hold.
I did a similar thing. Opened a position in VFWIX that Friday. Had I waited till Monday, it would have been even more shares, but I couldn’t have known that on Friday. VFWIX already outperformed my all other investments since that day I think.
John Richards says
Interesting about the new money point, and it reminds me of a recent Housel column about perspective. I just transferred a tiny old Roth IRA to Fidelity. It had been kind of locked into an old broker, and I hugely resented the broker and by implication, the fund I was in. I sold it all and and bought ILF. 99% of my retirement funds are in a diversified B&H Portfolio, so this is play money, from my perspective – and I’m playing with a market timing scheme, just for the fun of it. I have paid more attention to it than my main holdings, but as much out of curiousity as anything else. If I lost 50%, I’d shrug. I think your advice was very wise. Perspective matters.