A listener asks the following question:
"I’ve luckily survived the pandemic so far and my job has continued to be busy. Through the last few years, I’ve found that my savings have grown quite nicely but I’ve been hesitant to invest the extra cash into the market. Now I realize I have about $200,000 in cash that I can invest for the future. How do I get that invested when the market seems high? I know that I should do it, but it’s hard to pull the trigger. "
The academic research shows that the short answer is to put it all into a low-cost total stock market index fund. But we're not robots, and this person is an N of 1 and that just feels really hard.
Therefore I typically recommend for clients to divide the amount into 3 or 4 "chunks" and put a chunk in every 2-3 months. After the first chunk if the market goes up you feel good because you've made money. If the market goes down, you feel good because you have more to invest at lower prices. It's a win-win!
My recommendation is to put $50k into the market today. Mark the calendar for 3 months from now and put in another $50k on that date. Do not look at what the market does, or where it is, just do it on that day.
Of course, build a massively diversified portfolio of stocks and bonds, US and International. Have a plan for your money and stick with the plan.
We also discuss:
- Automation is your friend. Automate your savings and investing.
- The research about putting it all into the market at once
- Even if you invest at market "tops", you still come out ahead in the long term.
- What to invest in: low-cost index funds.
- Have a plan!
If you have a question, please get in touch! firstname.lastname@example.org
- A wealth of common sense: What if you invest at market peaks?
- Is the market overpriced?
- Account Funding Priorities
Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton chartered financial counselor and financial advisor. And with me today is Julie. Julie. Welcome back to the show.
Julie: [00:00:16] Thanks so much. I love being here.
Mike: [00:00:18] All right. Today I'm excited. We have a listener question. That was great. That came in and I'm super excited to dive into this topic.
So why don't we just go ahead and start off, Julie, if you don't mind reading out the question and we'll go from there.
Julie: [00:00:31] I'd be happy to. And uh, I find this question really. Timely because I've been thinking about the same thing that you did a recent blog post about the stock market. And after I get this question read for you, I have a couple of things to add to it.
Mike: [00:00:45] Perfect.
Julie: [00:00:45] all right. Listener says, Mike, thanks for providing such great information on the podcast and newsletter really useful tips.
Five points you. I had a question that I thought you could help out with. I've luckily survived the pandemic so far. And my job has continued to be busy. Through the last few years. I've found that my savings have grown quite nicely, but I've been hesitant to invest the extra cash into the market. Now I realize I have about 200 grand in cash that I can invest for the future.
How do I get that invested when the market seems high? I know that I should do it, but it's hard to pull the trigger. Any insights would be appreciated. Thanks.
Mike: [00:01:20] All right. Great question. And to be honest, Julie, I love this too, because I get this all the time. Pretty much all the clients that are coming in the door have had their own particular unique situations, of course, but they all have a little more cash than they want, and they know that coming in and they say, Hey, I've got, this extra $50,000, a hundred thousand or, I know I need to rebalance or take a look at my portfolio.
So this is of course a great problem to have, but I really appreciate the question so we can dive into some of the answers that I would typically give in this scenario,
Julie: [00:01:52] Yeah. And I'm extra curious because, I come from the era where it wasn't my generation, but my parents' generation that did some investing in the dotcom boom, and then lost a lot of money when that bubble burst. And right now we're seeing a huge rise in the stock market. And there are so many businesses that are booming because of the pandemic, which nobody knows what's going to happen with it.
But the hope is that things will go back to some sort of normal. And in that case, are we looking at another bubble burst? And how do we choose a conservative yet financially beneficial approach and not repeat mistakes of the past?
Mike: [00:02:37] Great question. And I definitely know I wrote that down. I want to circle back to that in terms of the stock market, where we are now, and especially in relation to the dotcom I have some thoughts on that. I do think we're in a different situation now. So I want to definitely mention that. And I also want to get back to what to invest in how to have your portfolio, but first let's answer the question of I've got extra cash:
How am I going to get into the market. How can I possibly do this, given my hesitation on market highs or volatility or, those kinds of questions. So the first thing I always look at is let's try to avoid this situation, right? Let's try to not have a stockpile of cash, growing for a couple of years.
That we know should have been invested. And so this leads me to automate as much as possible. And this is what most people do in their 401k plans. You've take a percentage of your salary 5%, 10%. And it is automatically put into the employer plan and you automatically have being invested, hopefully it's not just going into the cash portion, but you pick the target date fund.
And every time every two weeks or every month when you're paid, it comes out of your paycheck, goes straight into that target date fund. You don't think about it at all. And that is perfect. That's fantastic. So what else can we do? Beyond the 401k, you can do that in other places. So if you know that you're saving the maximum to your 401k, maybe you also want to have an individual retirement account, an IRA.
You can do the same thing. You can have it automated $300 a month, $500 a month. You just put it in there and you can also have it automatically invested into the stock market. Places like Fidelity, Vanguard, Schwab, all these places you can. Set up , automatic transfers, and you can have them go into a mutual fund, or what have you.
And you can pick a target date fund or whatever, and have them automatically invest it. So you don't have to think about it. The point here is whatever you can automate and not have to think about is fantastic.
Julie: [00:04:39] Although there is something to be said for the automatic transfer of funds into a savings account that, isn't going anywhere versus automating it to other funds that then you might feel compelled to have to watch and see if they're going up or down or what have you.
Mike: [00:04:57] Absolutely. And I think that gets back to your plan. So you should have a yearly plan. Hey, I'm going to max out my 401k. I know we want to do that. I want to max out my IRA. And then I also hope to have, our expect to have another 500 a month of savings or whatever it is. So you have a plan going into the year and you know that the 401k is being maxed.
And automatically invested, you know, that you want to do that in the IRA. Go ahead and automate it. So whatever you all know ahead and have that plan automate it. And if the plan is that 6,000 throughout the year go into the IRA is for the future for retirement. Then go ahead and just have it invested, just like your 401k.
So I think. Having a plan for the year is going to really help. And then of course we have to budget for the emergency savings and all the other things that you just need in that savings account, or you need for educational expenses coming up or trips or whatever it is. The whole point is to have a plan.
And as much as you can automate that plan, I think is super beneficial for the way the human mind works.
Julie: [00:05:57] Excellent. Thank you.
Mike: [00:05:58] Alright So, Moving on on from there, so we try to avoid it as much as possible from automation, but we still get in this situation. I still have, I still have this money. Mike how do I get this invested? Here's what I always tell clients. The stock market if you look historically, always goes up into the right.
Okay. Quote, unquote always goes up up and to the right and using the air quotes here. So if you look at a hundred year history, pull up a chart of the stock market over a hundred years, it literally just goes up and up into the right. It's perfect. It's fantastic. It's amazing. Now we know that's not true, but when you zoom out.
And you have a long-term view. It goes up into the right. Now with that said the research has looked at this. Should we take our $200,000 and put it in all at once? Into the stock market, just close our eyes hit the button, say, go, or do we put in over time, which is better? , the academics and the researchers love to look at these kinds of questions because everybody has them.
And the answer is intuitive. You should put it in all at once. Why because the stock market goes up into the right again, look back at that graph over a hundred years, take the long view. You should get your money working for you straight away. That's the academic research and it's proven quote unquote.
Okay. From academic side, put it in all at once. Has the statistically superior results. All right, so that's the first answer. Go ahead and just take your 200,000. And get a well, low cost index fund portfolio and put it all in at once. Now, the second point of that though, is that we are humans. All right.
We are not robots. And even though we know statistically, that sounds good. I am an N of one. All right. , we're not averaging over thousands and thousands of scenarios. It's just mine today. So this is what I usually tell clients to do is behaviourally let's put it in, in a few chunks over time.
Take your 200,000, split it into four chunks and do one each quarter over the next one year. All right. So 50,000 per quarter, pick a date. It doesn't have to be the start of the quarter. It can be any date, put it on your calendar. First, come up with a plan. What the portfolio is, Oh, I need to rebalance, or I need to put it in, this kind of thing.
I'm just gonna use a target date fund. That's fine. And do 50,000 a quarter. Put it on your calendar. Why do I recommend this? Let's think about it. I want you to feel good. All right. I want you to feel good about what you're doing. So you put in the first 50,000 and say the stock market goes up. You feel good?
You just made money. That's fantastic. I'm ready to put in the next 50,000, 3 months from now. Okay. What if the stock market goes down? You feel good? Why? Because you left some money on the sidelines. You're going to buy at a lower price. So whether the market goes up or down from here, when your dollar cost averaging into it, you're going to feel good about it.
And that's why I usually end up recommending that strategy.
Julie: [00:08:56] that's a, yeah, that is a really good strategy. because when you said throw the 200 K and I'm thinking, yeah, Are you crazy? What if I lose my job? What if, there's a million scenarios that all of a sudden you'd want that money back and you don't want to come up in this situation where the stock market has gone down and now your money is worth less.
So over time makes a lot more sense.
Mike: [00:09:15] yeah, that's right. You get scared, right? Just put it all in there. Oh, that's too scary. So having a plan and I mentioned a couple of times write it down in the calendar because when it comes to that next three months and you're ready to put in 50,000, you'll hesitate. I don't know, just the market just went up like crazy the last two weeks.
I'm just going to wait. No, you got it in the calendar. Just do it on that day. Don't think about it. Now. The other thing, Julie you did mention, what, if I lose the job or something you gotta think about that ahead of time. We've got it right. Emergency funds and other things. So make sure that, yeah.
There's 200,000 is part of the long-term portfolio. It's for five or 10 years from now. So we can go , into a well-diversified portfolio for the future.
Julie: [00:09:55] This circles back to the question that you said you would address too about, we are in uncertain times. And so typically speaking sure. Investing the 200 grand over a year. Sounds great. But then we come back to we're living in a world that is quite different from, it was from what it was.
A year and a half ago. And with no indication of what it's going to look like a year from now. So how do you balance the financial planning portion with the psychological portion of what's going on in the world?
Mike: [00:10:23] yup. Couple different ways to think about that. On that question. Let's think about the last 50 years of history, the stock market's been around for more than a hundred years, let's just think back 50 years. There was a housing bubble, right? Remember that time? That was pretty crazy. Remember Lehman brothers. Remember 2000? Dot com?, but remember 2001 September 11th. Right? How did that feel? That was pretty crazy. Let's go back further. Now this is beyond my history, Julie, but there's the interest rates that were 15, 17% in the seventies. You're getting a mortgage for over 12, 12% mortgage.
There were Wars, there were other pandemics, the history of the markets is broad and vast. And we have gone through many troubled times. Okay. So yeah, we are in another troubled time. Of course, it's not smooth sailing by any means. But the economies and markets have gone through these ups and downs and serious troubles.
And when you're in them, they feel very serious and wow, this is so different than it was before, and it is different, but the markets and economies have always come through. And in unexpected ways. If I told you, Hey, the whole world's shutting down in 2020, you would have said pull a hundred percent of my money out of that market.
If I had told you that ahead of time, Hey. In 2020, the world is shutting down. I would've pulled my money out of the mine. Oh my gosh, I better get my money out of stock market. And yet it went up almost 20% last year. So that it's really the way to think about it is that the markets are unpredictable in the utmost sense and stick with your plan, have a plan.
And stick with it and recognize, I always use that for the behavior side. Think back, like I just went through that mental exercise. Oh, okay. Yeah. And then it makes you feel better about, being invested today.
Julie: [00:12:14] True. I wonder though, would your advice be different depending on. The age of your client?
Mike: [00:12:21] Yes. Now, depending on the age of your client, the advice is different for having a different mix of stocks and bonds. And in fact, Julie, my newsletter that's coming out this week is all about that about having stability and having the right amount of cash and very stable bonds for your spending needs.
So if you're in retirement, I'm recommending a different portfolio than if you're, 40 years from retirement. Okay. But in terms of staying invested, it's the same advice. Stay invested, at the right asset allocation for your particular needs. Now let's also address your dotcom question cause I loved it.
I've read a lot about this recently. I've been following a lot of different stories and today's economy is quite different than the dotcom now we relate it to that 20 years ago because it feels, the it's just been going straight up. The market's been going up.
Everything's on fire. Feels like that. However, the fundamentals are completely different in the dotcom bubble. We had tons of companies without any earnings. It was all about eyeballs. Remember that? How many eyeballs are you getting? And that's what the measurement was. And if you were getting tons of eyeballs and that was going up and up, then your market capitalization, your company stock was going up and up there wasn't any earnings tied to it.
Today, Microsoft, Apple Google. These guys are producing record earnings. All right. Alphabet just came out best quarter ever. And so they're having record earnings. So they're actually making lots of money and the stocks have been rewarding them. Now, are they pricey? Maybe? Are they going to continue to go up?
Are they going to go flat? I don't know, but I can tell you that they're actually making money. And so that makes it a very different kind of environment.
Julie: [00:14:03] okay. That's a good way to explain the difference.
Mike: [00:14:07] Yeah. Yeah. So it is very, the fundamentals are very different this time. So it's easy to say, Oh, the same as dotcom but it's actually quite different now different. The other reason it feels that way is you read a lot of stories about cryptocurrencies and NFTs. If you've seen that. And some of these other markets are going absolutely bananas and they're hard to understand as well, because they're all new and they haven't been around that long.
That part, I do feel there's a lot of money sloshing around and we have no idea how it's going to come out the other side. So that's getting mixed in with the general stock market and companies that have been around making lots of earnings for many decades. So the stories are going to get mixed up in your mind and think Oh my gosh, everything's on fire in a bubble and parts of it maybe are, but the economy is chugging along pretty nicely.
Julie: [00:14:57] Good to know.
Mike: [00:14:58] All right. A couple other topics. I just want to mention, even if we are at a market top, you can still come out ahead. All right. So if this money that you're investing is $200,000 from this listener question. If this is truly for retirement in 10, 20 years, Hey, I'm in the middle of my career.
I built up some money. I still have plenty of time that I'm going to be working, enjoying that before, slowing down or having less income if that's for the future. Even if we're at a market top, it's still okay to invest. If you look back at the market tops of 2000 and dotcom 2001, if you look back at the market tops from the housing bubble, We're still ahead.
So even if you had invested at the top of those markets, we're here, we are 10 years later, or 20 years later, you're still ahead with interest and dividends. You've made a killing, even if you invest it right at the peak. So say this is the peak. Say today is the peak. Even if you put in all 200,000.
In 20 years, probably most likely looking at history, you're going to be well ahead. And I've seen lots of studies on that as well, and it's pretty interesting. So I'll link to that in the show notes that even if you invest at market tops, if you do it consistently over many decades, you're still going to come out ahead and that's reassuring as well.
Julie: [00:16:15] it is an indirect contrast to say the housing market, which a lot of us felt the financial constraints of that one, where we bought a house when the market was crazy high, and then the market went way down. And now here we are, what, 12, 13 years later. And Our properties have barely made it back to what we paid for it, but again, that investment is very different from what you're talking about in terms of the stock market.
Mike: [00:16:43] Yeah. And that's true. And also, it's provided you a place to live. So even though your investment
Julie: [00:16:48] one, but yes.
Mike: [00:16:49] is expensive. Yeah. It's true. And I'm in the same boat too. We moved right at that same time and my house is maybe worth what it was then. So it is it's challenging, but I always think back Hey it's a place that I'm living.
I got to live somewhere. I'm going to be here for another decade. . Yeah, and this is where what to invest in. Okay. When you're talking about a single home, that could be a real challenge depending on where you invest.
What if you're in a small community with one large employer and that employer goes out of business, suddenly your real estate really goes down in value. So when you have one home, Pretty risky in a sense, right? And the same is true with the stock market. If you want to pick one stock very risky. So my recommendation of course, is a massively diversified low cost index fund portfolio spread across thousands of companies that just chugs along.
So get rid of that idiosyncratic risk of a single company or a single home as much as you can. Now what to invest in. So that's the, how I think we've covered that pretty well recommend getting at $200,000 into the market, do it over three or four chunks over six to 12 months. Put it on the calendar, get the dates and then what to invest in. Just mentioned it massively diversified portfolio.
Look at what you currently have. See where you need to rebalance. Maybe you've got too much in the bond or fixed income, cash and bonds. Maybe you have a little bit too much in the equities. So you just look at your overall situation, your overall portfolio, and try to balance it out. I'm a big fan of target date funds.
Use them in your employer, 401k plans 403(b) plans. Also use them outside. Use them in your brokerage, your IRAs. You can use target date funds. They're
Julie: [00:18:32] What is a Target Date fund?
Mike: [00:18:34] Oh yeah. I'm sorry, Julie. Perfect question. What is this thing? A target date fund is a new invention. It's great. They've been around five or 10 or maybe a little bit longer than that years and what it is, it's a mix of stocks and bonds in a single fund.
So your a hundred dollars, you could buy a target, Vanguard, Schwab, fidelity, they all have these target date funds. They're called. That's what they're called. So you can look them up and they'll have a year associated with it. And the idea is that it's the year that you retire. So it might be 2040. 2050. So you get a target date fund 2050, well if it's 2050, that's 30 years from now, it's going to be heavily weighted towards stocks.
It's going to have about 90% stocks, 10% bonds. Perfect. And you got 30 years to go. Let's get that into the stock market. To your question earlier, right? What to invest in depending on your stage of life. If it's a 2025 fund, that's five years from now, four years from now, that's going to be 50 50, maybe between stocks and bonds.
A lot of bonds, a lot of fixed income bonds, because , we want that to be very stable. You put a million dollars in there. You want to know you have, majority of that money for five years from now. Cause that's when you're going to retire. So they're a one-stop shopping. For a diversified portfolio.
And so you pick your year of retirement and you can just put all your money in there. And they're great because they diversify across all, universe of stuff, stocks companies, thousands, and thousands of companies, and they throw in the bonds. And then over time as you're approaching retirement, they'll slowly shift the mix for you.
And so it's done for you, which is fantastic.
Julie: [00:20:08] Let me ask, is it for the target date fund, would it be something like a day trader is sitting there and moving your money back and forth? Or is this a fully out I just think of wall street and, people calling and buying and selling and is it that, or is it is it more controlled
Mike: [00:20:25] Yeah. It's like the stock market floor with the people yelling and waving the little tickers and stuff and throwing them on the floor and getting upset with each other
Julie: [00:20:33] right, does that still happen? I don't even know.
Mike: [00:20:36] in today's world. It is not like that at all. So it is completely automated and there are. Investment professionals at these firms. So whether it's, fidelity, target date fund, or Schwab, or what have you that come up with this, what did we call it? Glide path. And that's just a fancy word for slowly shifting from stocks to bonds.
. Every year, probably they will shift it slightly, maybe 1%, so it's 90% stocks to 89% and the next year it's 88%. So it's all very automated, a way they're not actively buying and selling. And then within those target date funds, they will use like the Vanguard one I know, will use their total Vanguard.
Us stock market Vanguard, total international market, the Vanguard total bond market. So they're using within one target date fund. They'll use their own sort of five low-cost index funds, and then just slowly shift the percentages maybe every six months or every year, they will also rebalance. So when there is a big decline, such as March of last year, they should get in there and do some rebalancing on that as well.
So these target date funds are just, again, A really good low cost one-stop shop that gives you a nice allocation between stocks and bonds, and then even within each of those sectors, just super diversified portfolio. So they're fantastic.
Julie: [00:21:59] Okay, so relatively safe.
Mike: [00:22:02] Yes. Yeah. It's relatively safe. I Obviously invested in the, into the market. But safe in the sense of it's a low cost set of index funds. Yep. Absolutely. At the end of the day, Julie, You really just want to have that plan. And that's what we talked about. So we have $200,000.
How do I get this invest in the market? I would suggest taking a couple of hours and think about how to automate going forward. What can you automate? How much can you save this year? Write that down. Just, it's a few bullet points. Write it down. How much can you automate? So I don't end up in this situation one year from now, then the 200,000 that you have.
Come up with the plan as well. I'm gonna do it over three chunks, four chunks. I'm going to do it over nine months, 18 months, put it in the calendar, know what you're going to buy, how much it's going to buy the target date fund. I'm going to buy a total stock market fund, whatever it is in your brokerage account and have that plan and then stick with the plan.
And I know that sounds very easy or it sounds very simple. It's not necessarily easy, but I think if you just spend a couple of hours. Jot down on a one pager. Oh, here's where I am. Here's the plan going forward? Put it in the calendar. It should be all set.
Julie: [00:23:16] Yeah, I really appreciate you diving into all of the historical and psychological elements that go into that. Because when I read the reader's question, I was instantly anxious, for him like, Oh gosh, I. Don't put that 200,000 all in the market when you're crazy. But this conversation has certainly opened my eyes and made me see that is the exact right thing to do and made it far less scary.
Mike: [00:23:43] Cool. And also one other small tip here at the very end , think of yourself five years from now, 10 years from now looking backwards. What do I wish I had done? so kind of Do the best you can on that front and try to minimize regrets is always a good behavioral thing to think about.
Julie: [00:23:57] , yeah, and I look back five years from now and I see what a positive change we've had in terms of our strategies. And you're right. It goes up into the right.
Mike: [00:24:09] exactly. All right. Julie is great. I think we really did a good job with this question. I think we covered a lot of really good ground and look forward to more soon.
Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at email@example.com. Until next time thanks for tuning in