By JLP | May 7, 2007
Check out this question sent to Walter Updegrave over on the CNNMoney website:
QUESTION: Is now the time to invest new money in mutual funds? I’ve been sitting on $100,000 for over a year because the market has been climbing to historic highs. I have always been told to buy low and sell high, so do you think I should wait for the correction before I invest this money. Or should I just invest it now?
– Mike B., Memphis, Tenn.
The S&P 500 Index was up 15.8% last year, while the Dow Jones Industrial Average was up 19.05%. And that’s not even including this year’s numbers, which are up too. This guy could be sitting on $115,000 or more had he just had the guts to make a move. Of course all this means that the market is a lot higher than it was a year, which probably makes this guy even more leery about getting into the market.
One thing he could consider doing is dollar-cost-averaging into a diversified portfolio of index mutual funds or exchange-traded funds. I know lots of people don’t like dollar-cost-averaging but for people like this guy it makes sense. He could ease into the market over a one or two year period. The risks of this strategy?
1. The market could continue going up, which means he would lose out on the growth of the money that’s not yet invested.
2. The market could go down, reducing the amount that he has invested but would mean each additional purchase would be buying lower-priced shares.
I have to wonder that if the market fell, would this guy have the guts to get in? Or, would he think the market was going to fall further and wait? What happens if the market falls 10% and he waits for it to fall further but the market turns around and moves up 15 – 20% or more? See how this stuff can really start playing with your mind if you let it?
There are no easy answers when it comes to investing. You just have to do it.