You are right to worry about this, current stock market valuations are not sustainable ..
Just avoid the risky bourse.
IMHO it's too late for refuge assets too.
But no one knows when the time comes for it to pop.
But on the other side. Let's say you invest now. In three years the bubble pops. In five you should be way above on what you have invested. Say around 20% plus in eight years.
Me too. Low fee index funds always seem to be the generic answer but after reading many articles and a couple of books about it, I am still not convinced. It seems to me that the rate of return has a lot to do with when you enter/exit the market and it is well known that you can't time the market so how is this different than any other gamble?
There was also a popular article(NYT?), which I can't find the link to at the moment, that showed me that only if you invest in the market for around 30 years or more, can you get a decent return. To me that makes sense if you want to leave your kids a little something after you're gone but not for your own lifetime.
Can someone educate me on this? Does everyone reply "index funds" because it is fashionable to do so or am I missing something here?
> It seems to me that the rate of return has a lot to do with when you enter/exit the market
Most people "enter the market" continuously by depositing a percentage of their pay each month of their career and "exit the market" slowly and continuously during retirement 40 years later.
The booms and busts in between become irrelevant and you're left with a nice and high average rate of return.
In fact, even if you started investing in an S&P 500 index fund at the top of the market right before the big crash of 2007 (financial crisis), you'd still have a very decent return today.
That article convinced me otherwise. I wish I could find it now because I'd love to get some input on the numbers that, I'm assuming, I'm reading correctly.
"There was also a popular article(NYT?), which I can't find the link to at the moment, that showed me that only if you invest in the market for around 30 years or more, can you get a decent return. To me that makes sense if you want to leave your kids a little something after you're gone but not for your own lifetime."
What about investing for your own retirement? If you start investing when you begin your first job (usually in your 20s), and you expect to retire in your 60s and live into your 80s, that'll certainly give you at least a 30-year investment horizon.
I'm already in my early 30s and my circumstances did not allow me to start investing in my 20s even if I had the knowledge. I won't get into it now but it wasn't possible then. So that means I can only start investing now. Assuming that you do follow the expected timeline, what does retirement mean? Spending money for when you're no longer able to work? That assumes that you actually own your own home and only need spending money + medical expenses. And how can you unless you've invested in your 20s plus have you seen the current real estate market(Australia)?
I'm not sure I have a specific point except to say that the math stops working unless you follow the exact path expected.
Consider the alternatives to the index fund:
1. Pick individual stocks and directly buy those. (A lot less diversification and a lot more hands-on management required.)
2. Hire a stock broker to invest for you. This is like #1 except now you are at the mercy of someone else whose interests you cannot be guaranteed to align with you.
3. Managed investment fund. Funds are diversified based on the discretion of the funds manager. Big fees are required for the privilege of having one pick stocks to buy and sell for the portfolio.
4. Real estate. Good investment but exceedingly high initial capital requirements.
5. Commodities - gold, silver, oil, pork bellies, etc. Less diversity of investment and specialist knowledge of the commodity are required.
Index funds are low cost to run, have a low capital requirement, require little to no active management, are highly-diversified, and get a fairly good rate of return. As a default option of 'do nothing and some money comes in', that's hard to compete with.
Oh I agree. They're a good deal considering the alternatives but they also carry a lot of risk. Less risk than individual stocks of even specialized baskets but a lot of people throw the term around as if its magic. Several source I've read also assume that you'll constantly be putting money into the market and never withdrawing it to actually buy that house you start this whole thing for. Withdrawing the money means your rate of return depends on which cycle the market is in when you do it and to get the best rate, you need to withdraw when its peaking. That's timing the market. That's misleading...
But overall, I agree with your analysis. It's a great vehicle for people who either lack the time or knowledge required for investing. If you decide that stock investment is the best way forward for you...
So if your time horizon is short buy bond index funds instead. The context of recommending index funds is almost always when saving for your retirement. Don't invest 100% in equities unless you're very young and can stomach the volatility. Your asset allocation should tilt more towards less volatile assets like bonds and cash as to get older. You slowly enter the stock market as you save up, and slowly exit it into other assets as you age.
Yep, I'm aware of the recommendation to use your age as a rough percentage to how much you need to have invested in more secure vehicles. Solid advice I guess.
I still haven't looked at the numbers to see if it's worth it. In Australia, we're expecting a market correction to happen initiated by the real estate bubble finally busting. Which means that bonds would gain while the market loses. Of course people have been expecting that for many years now and statistically speaking it will have to happen at some time... Knowing this, I am still not sure whether to just invest and deal with the consequences if and when they happen or keep my money in my sock drawer.
Index funds don't require you to manage your investment. Basically, there is a simple rule set the fund follows to diversify your portfolio and grow your money. Unlike managed funds, there aren't fees to the fund manager to eat into the profit/growth rate.