If it's the last week of the month, odds are Alison Southwick and Robert Brokamp are going to amble over to the Motley Fool Answers mailbag to find out what it is their listeners really want to know. And for added gravitas and expertise, they've brought in reinforcements: Naima Barnes, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool.
In this segment of the podcast, a 29-year-old teacher goes to the head of the class, because he's ready to start investing. However, he has been staying on the sidelines because he's afraid to buy stocks right before the market crash so many pundits see just ahead. The Fools explain why market timing is a poor strategy, but also offer a bit of advice on how to cushion oneself against the risk of a big downturn while still deploying those funds.
Naima Barnes is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional.
A full transcript follows the video.
This video was recorded on May 29, 2018.
Alison Southwick: Our final question comes from Josh. "I'm a 29-year-old teacher from Florida and would like to start investing. I pay into a pension fund for work but have saved another $10,000 and I'm unsure where best to allocate it. I'm most interested in putting the money in the stock market and I've had success so far; however, I recognize that I'm pretty late to the party." Oh, Josh! You are not late to the party!
"And I am worried about the dreaded correction that is coming. I'm not really interested in starting an IRA. Should I just pull my money out and wait for the correction, or put my money somewhere else?" All right, Naima.
Naima Barnes: Well, Josh...
Robert Brokamp: First of all, we love Josh for two reasons. He's a teacher...
Barnes: He's a teacher.
Southwick: From Florida!
Brokamp: From Florida! I am also.
Southwick: You're a teacher from Florida.
Brokamp: This is the truth, yes. All right, go ahead, Naima.
Barnes: That's awesome. So, first things first. I would make sure that you have an emergency savings, because I'm all for it. You need to make sure that you can cover an unexpected car expense. An unexpected flight to go see family. If you've already got that covered, great. It's also great that you're paying into your employer's pension plan because that will be a stream of income when you're in retirement.
In terms of the $10,000, seeing that you've hypothetically already covered your emergency expenses, just go ahead and invest it. There's no time like the present. If right now you're not making anything really [you might be making that 0.04% on your bank account], why not try and make a few extra dollars on it? Put it inside of a taxable account, since you don't want to use an IRA, and get into the market.
Southwick: He could also dollar-cost average into it, right? Like if he's worried that there's a correction around the corner... And by the way, people have been saying that there's a correction around the corner for the last 10 years.
Brokamp: Including us.
Southwick: Including us.
Brokamp: Including me, I should say.
Southwick: Yes, you're a little, dark rain cloud over that. So, he could also dollar-cost average in. Just go in a few thousand every few months.
Barnes: Yes, he can definitely do that. Dollar-cost averaging can also be tricky because say, for example, one of your stocks starts at 10 bucks, and then it goes to 15 bucks, you've already made five bucks and you're waiting for it to go down a bit, then you're still doing a little bit of market timing. That's the only concern with dollar-cost averaging, but if you're just purely moving it from cash and then just investing it however you invest it, then that's fine, too.
Brokamp: I recently did a little bit of research on how stock market valuation affects the safe withdrawal rate in retirement. There have been many studies about this going back four, five, six years. And every single one of those articles said, "Well, people should be nervous, now, because the stock market is so expensive and who knows what's right around the corner."
But, of course, the market has done pretty much nothing but go up since then. This year has been a little dicier. And these articles are written by some of the smartest people in financial planning.
The bottom line is no one really knows when the correction is coming. Josh, you're young. Assuming that this money is for retirement, you've got decades for this to recover from any correction that happens. Chances are you're just better off investing it now.
Southwick: Right. We want you to hold these investments for three, five, 10 and even more years. There will be plenty of time for you to go through a horrible, painful period but then come out on the other end happy.
Barnes: Time is on your side.