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A note from a dedicated reader inspired today’s article. It’s a question about the stock market and investing at all-time highs. It reads:
Hey Jesse. So, back in March you said that you were going to keep on investing despite the major crash. Fair enough, good call!
Note: here and here are the two articles that likely inspired this comment
But now that the market has recovered and is in an obvious bubble (right?), are you still dumping money into the market?
Thanks for the note, and great questions. You might have heard “buy low, sell high.” That’s how you make money when investing. So, if the prices are at all-time highs, you aren’t exactly “buying low,” right?
I’m going to address this question in three different ways.
- General ideas about investing
- Back-testing historical data
- Identifying and timing a bubble
Long story short: yes, I am still “dumping” money into the stock market despite all-time highs. But no, I’m not 100% that I’m right.
General Ideas About Investing
We all know that that investing markets ebb and flow. They goes up and down. But, importantly, the stock market has historically gone up more than it has gone down.
Why does this matter? I’m implementing an investing plan that is going to take decades to fulfill. Over those decades, I have faith that the average—the trend—will present itself. That average goes up. I’m not betting on individual days, weeks, or months. I’m betting on decades.
It feels bad to invest right before the market crashes. I wouldn’t enjoy that. But I’m not worried about the value of my investments one month from now. I’m worried about where they’ll be in 20+ years.
Allowing short-term emotions—e.g. fear of an impending crash—to cloud long-term, math-based thinking is the nadir of result-oriented thinking. Don’t do it.
Don’t believe me? Here’s a fun idea. Google the term “should I invest at all-time highs?”
When I do that, I see articles written in 2016, 2017, 2018…you get it. People have been asking this question for quite a while. All-time highs have happened before, and they beg the question of whether it’s smart to invest. Here’s the S&P 500 data from 2016 to today.
So should you have invested in 2016? In 2017? In 2018? While those markets were at or near all-time highs, the resounding answer is YES! Investing in those all-time high markets was a smart thing to do.
Let’s go further back. Here’s the Dow Jones going back to the early 1980s. Was investing at all-time highs back then a good idea?
I’ve cherry-picked some data, but the results would be convincing no matter what historic window I chose. Investing at all-time highs is still a smart thing to do if you have a long-term plan.
Investing at all-time highs isn’t that hard when you have a long outlook.
But let’s look at some hard data and see how the numbers fall out.
Historical Backtest for Investing at All-Time Highs
There’s a well-written article at Of Dollars and Data that models what I’m about to do: Even God Couldn’t Beat Dollar-Cost Averaging.
But if you don’t have the time to crunch all that data, I’m going to describe the results of a simple investing back-test below.
First, I looked at a dollar-cost averager. This is someone who contributes a steady investment at a steady frequency, regardless of whether the market is at an all-time high or not. This is how I invest! And it might be how you invest via your 401(k). The example I’m going to use is someone who invests $100 every week.
Then I looked at an “all-time high avoider.” This is someone who refuses to buy stocks at all-time highs, saving their cash for a time when the stock market dips. They’ll take $100 each week and make a decision: if the market is at an all-time high, they’ll save the money for later. If the market isn’t at an all-time high, they’ll invest all their saved money.
The article from Of Dollars and Data goes one step further, if you’re interested. It presents an omniscient investor who has perfect timing, only investing at the lowest points between two market highs. This person, author Nick Maggiulli comments, invests like God would—they have perfect knowledge of prior and future market values. If they realize that the market will be lower in the future, they save their money for that point in time.
What are the results?
The dollar-cost averager outperformed the all-time high avoider in 82% of all possible 30-year investing periods between 1928 and today. And the dollar-cost averager outperformed “God” in ~70% of the scenarios that Maggiulli analyzed.
How can the dollar-cost averager beat God, since God knows if there will be a better buying opportunity in the future? Simple answer: dividends and compounding returns. Unless you have impeccable—perhaps supernatural—timing, leaving your money on the sidelines is a poor choice.
Investing at all-time highs is where the smart money plays.
Identifying and Timing a Bubble
One of my favorite pieces of finance jargon is the “permabear.” It’s a portmanteau of permanent and bear, as in “this person is always claiming that the market is overvalued and that a bubble is coming.”
Being a permabear has one huge benefit. When a bubble bursts—and they always do, eventually—the permabear feels righteous justification. See?! I called it! Best Interest reader Craig Gingerich jokingly knows bears who have “predicted 16 of the last 3 recessions.”
Suffice to say, it’s common to look at the financial tea leaves and see portents of calamity. But it’s a lot harder to be correct, and be correct right now. Timing the market is hard.
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
Predicting market recessions falls somewhere between the Farmers’ Almanac weather forecast and foreseeing the end of the world. It takes neither skill nor accuracy but instead requires a general sense of pattern recognition.
Note: The Farmers’ Almanac thinks that next April will be rainy. Nice work, guys. And I, too, think the world will end—at least at some point in the next few billions of years.
I have neither the skill nor the inclination to identify a market bubble or to predict when it’ll burst. And if someone convinces you they do have that skill, you have two options. They might be skilled. Or they are interested in your bank account. Use Occam’s Razor.
Just remember: some permabears were screaming “SELL!” in late March 2020. I’ve always heard “buy low, sell high.” But maybe selling your portfolio at the absolute market bottom is the new secret technique?
“But…just look at the market”
I get it. I hear you. And I feel it, too. If feels like something funny is going on.
The stock market is 12% higher than it was a year ago. It’s higher than it was before the COVID crash. How is this possible? How can we be in a better place mid-pandemic than before the pandemic?
One explanation: the U.S. Federal Reserve has dropped their interest rates to, essentially, zero. Lower interest rates make it easier to borrow money, and borrowing money is what keeps businesses alive. It’s economic life support.
Of course, a side effect of cheap interest rates is that some investors will dump their cheap money into the stock market. The increasing demand for stocks will push the price higher. So, despite no increase (and perhaps even a decrease) in the intrinsic value of the underlying publicly-traded companies, the stock market rises.
Is that a bubble? Quite possibly. But I’m not smart enough to be sure.
The CAPE ratio—also called the Shiller P/E ratio—is another sign of a possible bubble. CAPE stands for cyclically-adjusted price-to-earnings. It measures a stock’s price against that company’s earnings over the previous 10-years (i.e. it’s adjusted for multiple business cycles).
Earnings help measure a company’s true value. When the CAPE is high, it’s because a stock’s price is much greater than its earnings. In other words, the price is too high compared to the company’s true value.
Buying when the CAPE is high is like paying $60K for a Honda Civic. It doesn’t mean that a Civic is a bad car. It’s just that you shoudn’t pay $60,000 for it.
Similarly, nobody is saying that Apple is a bad company, but its current CAPE is 52. Try to find a CAPE of 52 on the chart above. You won’t find it.
So does it make sense to buy total market index funds when the total market is at a CAPE of 31? That’s pretty high, and comparable to historical pre-bubble periods. Is a high CAPE representative of solid fundamentals? Probably not, but I’m not sure.
My Shoeshine Story
There’s an apocryphal tale of New York City shoeshines giving stock-picking advice to their customers…who happened to be stockbrokers. Those stockbrokers took this as a sign of an oncoming financial apocalypse.
The thought process was: if the market was so popular that shoe shines were giving advice, then the market was overbought. The smart money, therefore, should sell.
I recently heard a co-worker talking about his 12-year old son. The kid uses Robin Hood—a smartphone app that boasts free trades to its users. Access to the stock market has never been easier.
According to his dad, the kid bought about $100 worth of Advanced Micro Devices (ticker = AMD). When asked what AMD produces, the kid said, “I don’t know. I just know they’re up 60%!”
This, an expert might opine, is not indicative of market fundamentals.
But then I thought some more. Is this how I invest? What does your index fund hold, Jesse? Well…a lot of companies I’ve never heard of. I just know it averages ~10% gains every year! My answer is eerily similar.
I’d like to believe that I buy index funds based on fundamentals that have been justified by historical precedent. But, what if the entire market’s fundamentals are out of whack? I’m buying a little bit of everything, sure. But what if everything is F’d up?
Have you ever seen a index zealot transmogrify into a permabear?
Not yet. Not today.
I do understand why some warn of a bubble. I see the same omens. But I don’t have the certainty or the confidence to act on omens. It’s like John Bogle said in the face of market volatility:
Don’t do something. Just stand there.
Markets go up and down. The U.S. stock market might crash tomorrow, next week, or next year. Amidst it all, my plan is to keep on investing. Steady amounts, steady frequency. I’ve got 20+ years to wait.
History says investing at all-time highs is still a smart thing. Current events seem crazy, but crazy has happened before. Stay the course, friends.
And, as always, thanks for reading theÂ Best Interest. If you enjoyed this article and want to read more, Iâd suggest checking out myÂ ArchiveÂ orÂ SubscribingÂ to get future articles emailed to your inbox.
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Investing is more than just saving for the future â itâs about creating a wealth-building strategy to truly make your nest egg grow. Thatâs because investing typically earns you a higher interest rate than if…
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The best money market mutual funds are a good place to keep your cash while earning interest.Â Bank checking and savings accounts and money market accounts are good alternatives for your cash.
But money market funds offer a higher rate of return than these other short-term investments.
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One of the best money market mutual funds is the Vanguard Prime Money Market Fund. This fund has a current yield of 1.69%. That is way more than any checking and savings account are offering.
Money market funds are considered very safe. However, they are not FDIC insured. If the lack of FDIC insurance concerns you, you may wish to invest in online savings accounts, money market accounts, or certificate of deposits (CDs).
In this article, we will define what a money market fund is. We will list the cons and pros of those funds. We will address the main situations you will need these type of funds. Finally, we will list the best money market mutual funds to choose from.
What are money market funds?
Money market funds are a type of mutual funds. They were launched in 1975 as a way to provide investors quick liquidity to their cash, provide current income and protect the investors’ principal.
Since then, they have become extremely popular. Unlike other mutual funds which focus on other securities such as stocks and bonds, they invest in “money market” securities.
Large companies and corporations, financial institutions and the U.S. government borrow money by issuing “money market” securities as promises to repay the debts.
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For instance, the U.S. government borrows money by selling bonds or Treasury bills or notes. Banks borrow money by selling certificate of deposit (CDs).
Big companies borrow money by issuing IOUs called commercial paper. These money market securities make up the money market fund.
Mutual fund and investment companies such as Vanguard and Fidelity offer these investments. They are low risk and they provide high yield.
Some funds are intended for retail investors. Retail investors are natural investors like you and me.
On the other hand, there are funds that are intended for institutional investors. Those funds usually require high minimum investments.
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Money Market funds vs. Money Market Accounts
The names may sound the same. But, they are two different types of investments.
To recap, a money market fund is a type of mutual fund. A mutual fund company such as Vanguard or Fidelity offers this type of investment. These funds invest in short-term debt. They offer higher returns than money market accounts.
On the other hand, a money market account is a type of savings account. Banks offer them.
But the rates of return are typically higher than that of a typical savings account. Unlike money market funds, they are insured by the FDIC.
Money market fund advantages:
Money market funds are one of the best and safest places to invest your hard-earned money. You will earn more interest than in a regular savings or checking account. Here are some of the advantages of these funds.
They are very safe. Money market funds are not FDIC insured, like savings accounts and CDs are. But, they are very safe.
Since they were launched, only 2 out of hundreds have run into trouble. If you concerned about the lack of insurance, you may wish to consider an online savings account or a money market account.
They are liquid and easily accessible. Another advantage of money market funds is that you have immediate access to your money.
You may withdraw your money anytime you wish without incurring penalty. Also, you can cash in your shares by phone, online, by mail or through your broker with relative ease.
You may write checks. Another positive aspect of a money market fund is that you can tap your money by writing checks against your account with no charge.
And some funds allow you to write checks for any amount for free.
They provide higher yields. They pay higher yields than a traditional savings account.
The reason is because the borrowers, i.e., the US government and big corporations are solid institutions and they agree to repay the debts at high interest rates.
Tax advantages. Some funds invest in securities where the interests are exempt from federal taxes, and in some cases state income taxes.
All of these factors make money market funds popular with people who want to invest for their short term goals.
While there several pros to investing in money market funds, there are some cons as well.
Lower return. Because access to your money are relatively easy in a money market fund, they have lower returns than other investments such as stocks, bonds and index fund.
They are not FDIC insured. As mentioned earlier, the federal government does not insure these funds .
Other investments such as online savings accounts, money market accounts, certificate of deposits are. But again they are very safe.
However, if the lack of FDIC insurance bothers you, stick with bigger mutual fund companies.
Situations when investing in money market funds makes sense?
You have a short-term investment goal. You may want to invest in these funds for short-term goals.
If you’re planning on buying a house in the next year or so and looking for safe place to save for the down payment, then they’re a good place for your cash.
You’re saving for a rainy day. If you’re saving for an emergency fund, a money market fund is also a good place to park your cash.
You certainly don’t want to invest in the stock market, because you can lose money within a relatively short period of time due to market volatility.
You want to diversify your portfolio. Money market funds are not aggressive investments such as stocks or bonds.
That’s why these funds are safer and very conservative. When the stock market plunges, these funds can balance your portfolio out.
So, you can use this type of investment as a complement to your other and riskier investments.
The best Vanguard money market mutual funds:
|Fund name||Fund Ticker||Min.
|Vanguard Prime Money Market||VMMXX||$3,000||0.16%|
|Vanguard Treasury Money Market||VUSXX||$50,000||0.09%|
|Vanguard Federal Money Market||VMFXX||$3,000||0.11%|
|Vanguard Municipal Money Market||VMSXX||$3,000||0.15%|
1. The Vanguard Prime Money Market Fund (VMMXX).
This Fund is perhaps one of the best out there.
However, this fund requires a minimum deposit of $3,000 just to open an account. This can be steep for a beginner investor with little money. The expense ratio is 0.16%.
There is no purchase or redemption fees. The fund has a total asset of $127.5 billion as of January 2020.
The Vanguard Prime Money Market primarily invests in foreign bonds, U.S. treasury bills, and U.S Government obligations.
2. The Vanguard Treasury Money Market Fund (VUSXX).
As the name suggests, this Vanguard money fund only invests in U.S. Treasury bills. However, the fund has a minimum initial investment of $50,000.
It may be out reach for beginner investors with little money. But the expense ratio is 0.09%.
The current yield is 1.58% while the 10 year yield is 0.55%. If you are a wealthy investor, you should consider this fund.
3. The Vanguard Federal Money Market Fund (VMFXX).
This Vanguard money fund is perhaps the safest and most conservative of all funds, simply because they invest in U.S. government securities.
U.S. guaranteed securities are considered risk-free investments. It intends to provide current income while maintaining liquidity.
This Vanguard fund requires a $3,000 initial minimum investments. It has a 0.11% expense ratio.
The current yield is 1.58% and a 10 year yield of 0.55%.
So, if you have a short term goal and are interested in a Vanguard fund that invests in U.S government securities, you may wish to consider this fund.
4. Vanguard Municipal Money Market Fund.
This Vanguard fund invests in short-term, high quality municipal securities.
What makes this fund a great one is that it provides income that is exempt from federal personal income taxes.
If you are in a higher tax bracket and are looking for a competitive tax-free yield, you should consider this fund.
Similar to other funds, the initial minimum investment is $3,000 with a 0.15%. This fund has a current yield of 1.20% and a 10 year yield of 0.44%.
Overall, you should consider investing in these best money market funds, because they generally pay you better than bank savings accounts and money market accounts.
But the FDIC does not insure you. However, they are very safe. If the lack of FDIC insurance does not bother you, you should try them.
Decide whether investing in money market is best for you
While a money market fund may sound great, it’s not for everyone. It won’t help those with a long term investment strategy, such as retirement.
For those with a long term focus, investing in individual stocks, real estate, or index funds may be an option instead.
Moreover, younger and aggressive investors should keep less money in money market funds than older investors who are approaching retirement.
However, if you’re looking to make a purchase soon (in the next year or so), such as buying a home, these funds make sense.
In addition, investors who want to diversify their portfolio may find that money market funds are great investments as they are very safe when compared to risky alternatives such as stocks and bonds.
Work With A Financial Advisor Near You
If you have questions beyond the best money market mutual funds, you can talk to a financial advisorÂ who can review your finances and help you reach your goals. Find one who meets your needs withÂ SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals,Â get started now.
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If you’ve never considered real estate investing because you don’t want to own rental properties or be a landlord, you may want to look at these options.
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Confusion and uncertainty will always be a part of investingâs rollercoaster ride. Whenever the market experiences a downward trend, the demand for gold increases as people seek out âsafeâ investments. According to the World Gold Council, the price for gold during the first quarter of 2020 shot up to almost its highest point in the past 10 years.
Gold is a different beast from most other investments. Generally, when thereâs a lot of fear about where the future is heading â when stocks do poorly and gold does well.
However, gold is also a physical product that you own completely. But it also doesnât produce anything of value on its own. For these reasons, itâs a riskier investment and requires special considerations.
Why Invest in Gold?
If youâre worried about the economy (and even society) tanking, gold is an touted investment option. Itâs considered a âsafe-haven investmentâ because when the stock market sinks, the gold market sails steadily on, often even increasing in value. When the stock market rises, though, gold doesnât gain much value.
This likely occurs because of the unique nature of gold compared to more traditional investments. Unlike a share in a company (i.e., a stock), gold doesnât produce anything. It doesnât hire employees, pay taxes, or contribute anything aside from being a shiny object that people like.
Its value comes from what we give it, and when weâre afraid of economic factors, we value it a lot. After all, in a post-apocalyptic world you might be able to trade gold for things you need to survive, whereas a stock share would be useless.
Generally, when thereâs a lot of fear about where the future is heading âÂ when stocks do poorly and gold does well.
Thatâs not to say that we should all be investing in gold, however. Itâs far more likely that things will chug along as normal, in which case, gold is a bit of a hassle at best. Your money likely wonât grow as fast if you hold gold versus stocks.
If you own physical gold, youâll have to professionally store it and insure it. And if you donât want to bother with physical gold, youâll need to suss out the pros and cons of other gold alternatives, like gold ETFs and gold cryptocurrencies.
|-Holds value (or grows) during a recession
-Gives you real, tangible wealth
-Might be able to barter gold for goods and services in difficult times
-Gold alternatives allow you to invest in gold without actually storing it
|-Doesnât grow much wealth in a robust economy
-Requires storage and safety solutions
-Can be lost or stolen
-Gold alternatives can be confusing and complicated
-Doesnât produce anything of value on its own
How to Invest in Gold
There are actually a lot of different ways to invest in gold. Depending on your goals, some are better than others.
Since gold is primarily a wealth-preservation tool you might be interested in investing in it as a part of your retirement strategy. The good news is youâre not the first person to have this idea and there are ways to do it. The bad news is itâs not as simple as plopping some money in your brokerage account, and there are only a few places to do it.
Orion Metal Exchange is one example of a place where you can invest in gold within an IRA.You can even roll over funds from an existing IRA into a Gold IRA.Â
Another place you can invest in gold within an IRA is Patriot.
You do get actual gold with this strategy so youâll need to store it inside of an independent third-party vault. Orion Metal Exchange offers suggestions for where to store it, and can help walk you through the process of opening a gold IRA.
Gold Futures Options
As a rule, trading in futures of anything isnât a strategy for new investors, and thatâs true for gold too. When you invest in gold futures contracts, youâre betting on whether the market will go up or down rather than buying the actual gold itself â and that requires a deep level of knowledge about how the gold market works.
You agree to buy a certain amount of gold at a predetermined time in the future for a predetermined price. Most investors sell the contracts themselves before it actually comes time to buy the gold, however.
If you thoroughly understand the process â and thatâs not an easy feat â you could rake in a lot of money. You can also leverage your existing cash to magnify your returns far beyond your initial investment amount.
Since this is such an advanced and risky strategy, there arenât that many markets where you can buy and sell contracts in gold futures.
The most obvious and probably most popular way to invest in gold is simply to buy it. But you need to buy the right kind of gold.
Many people think that buying jewelry is a good investment, but this is usually not the case.The additional labor and materials involved in making jewelry can actually result in a melted-down gold value that isnât as high as the cost of the jewelry itself. To the untrained eye most collectable coins are also poor investments, because theyâre often made of a gold veneer or alloy material.
Instead, most gold investors recommend buying gold bullion, which is a defined amount of pure gold with its weight stamped right on it. Bullion can come as a gold bar or as coins. Bullion coins are easier to store, parcel apart, sell (how would you sell half a brick of gold?), and theyâre easier to buy over time with a dollar-cost averaging approach.
Some things that are important to remember when investing in gold:
- Know what youâre buying â is it pure gold? Whatâs its weight? Whatâs its value?
- Insure your gold in case of fire, theft, or some other disaster
- Buy gold from a reputable dealer like Oxford Gold Group, Lear Capital or Goldco
- Use safe storage, either in a safe deposit box at the bank, or an off-site vault like with Norman Sellers
Gold Mining Stocks
Aside from melting down family heirlooms, the only way more gold is being put into production is by mining it. By investing in gold mining stocks, you donât have to worry about physically storing and securing your own gold. But you can still own a share of the companies that mine gold.
Gold mining stocks are a risk on their own, too. Mining, in general, isnât great for the environment, so many gold mines are located in countries with lax environmental regulations. These tend to be less-developed countries, where wars and civil unrest are more widespread. This can be a big risk for your stock strategy; if you get unlucky and the company you invested in has a major mine collapse with negative PR, for example, your stock value could tank.
If you still want to invest in gold extraction, but donât want the hassle of vetting individual companies, investing in a gold ETF can be a good option.
Like investing in regular ETFs, gold ETFs are essentially a basket of different gold mining stocks rather than individual mining companies. This also spreads your risk across multiple companies so that youâre not betting on a single horse. SPDR Gold Shares (GLD) is one of the most popular gold ETFs on the market today.
Invest in Gold Through Crypto
You can actually blend old-world investment strategies with new-world ones by investing in the PAX Gold (PAXG) cryptocurrency. Gold is notoriously expensive to even start purchasing (the current price as of this writing is $1,913 per ounce), and PAXG offers a big advantage because you can get started for just a hundredth of a troy ounce, or about $20.
You donât get your own pieces of gold when you buy PAXG but it is linked to âallocatedâ gold. This means that each PAXG token is linked to a physical piece of gold, with your name on it, in a storage vault. In this way itâs similar to how the U.S. dollar was originally backed by gold before becoming fiat currency (i.e., not linked to actual gold in a vault).
One of the general disadvantages of investing in gold is that you canât earn any interest on it like with a bank account. Unless, of course, you open a Blockfi account to store your PAXG, which pays out interest and even lets you borrow against your digital wallet.
The Bottom Line
Gold is a specialized investment thatâs often overhyped. Still, it might still have a legitimate (if small) place in your portfolio. To know if investing in gold is right for you â and if so, which option â we recommend speaking with a financial advisor.
Even if youâre a pro and feel ready for complicated gold futures contracts, itâs still a good idea to sit down for a chat with an impartial third party. Itâs a good way to double-check your investment plans, lest you catch a case of shiny-object syndrome and get too carried away.
The post How to Invest in Gold appeared first on Good Financial CentsÂ®.
What steps can I take to protect my money when using a trading app? How do people lose money with trading apps?
The post Can You Lose Money with Trading Apps? appeared first on The Dough Roller.
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