…discussion at Vanguard Diehards forum, started by a newbie investor after today’s big stock market jump. Does it sound familiar?
I am 27 years old and just recently decided to buy into the market in a lump sum in a taxable account … on May 10, 2006, I jumped right in with about 35K. I couldn’t have picked a worse time to buy in. Two months later I’m down $2,600 with no recovery in sight, and little confidence of any near term turnaround. So last Friday, I moved everything to a money market account, and missed today’s bounce. Now I’m convinced that I will always make the wrong investment decisions, and can’t get the thought of knowing that I threw that money away out of my mind. What do I do now? Should I DCA money back in? Should I buy back in right now? Should I wait a few months and see how the market is performing? Should I cut my losses and abandon the market forever outside of my retirement accounts?
It sure sounds familiar to me, and I bet it happens all the time to beginning investors. I remember the first year I actually had some money saved up and I opened up an IRA in ~2001 with my hard-earned $1,000. I bought Janus Mercury, which for those that remember was a really hot mutual fund back then. Rated 5 stars by Morningstar! Umm… yeah, bad call. I also remember how losing money felt so painful, like someone just walked up and took the money right out of your wallet. Of course, the second you sell to protect the rest of your money, the market starts to rise again.
Anyhow, if you read the replies by many of the forum veterans, there is a lot of good advice there. In the end, learning from these few stumbles may end up saving him/her a lot more than a few thousand dollars down the road.
(This example also reinforces my opinion that online risk questionnaires are often useless.)
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that says clueless people shouldn’t trade short-term but invest long-term instead.
Trying to time the market will cause things like this to happen more often than not. Feel sorry for him, but hopefully he’s learned a valuable lesson…
I think everyone needs to learn this lesson. Earlier this year I had planned to dollar cost average into my roth ira from june until the end of the year. Well, in may we had a downturn and I thought what a great opportunity to buy the dip. Well, needless to say the rest of may and early june wasn’t too good. For my income and assets the amount seemed like a lot and felt like someone punched me in the stomach.
However, I’m glad that it happened because it was a great lesson. I’m also glad that it was a roth ira so I didn’t contemplate taking the money out like this guy. I’m guessing in a few months I won’t care about the small amount I lost because I tried to time the market but will be grateful for the lesson I learned.
This is a major problem, most people should just be diverisifed and stop gambling. If you went to a casino and you dropped $2k or $20k real fast, I’m sure some people would think you might have a gambling problem. Well the stock market is the world’s biggest casino if you don’t have a plan.
never mind – according to efficient market theory this guy doesn’t actually exist 😉
I did the same thing, a Latin America fund with my first $1000. It went south and the fund was even disolved. Lost another 1k with Polaroid stock. But then I also hit a 800% gain with Gentech. Not sure of my point.
I always find it amazing that people do this. I am a very risky investor but I’m very knowledgable about what I’m doing. I, very cautiously, pretend invested for two years before I started seriously investing my real money. I learned what to do and how to think. I learned how to evaluate stocks and entry levels and how to set target prices. I also learned the art of just holding and not selling. After all, if you know what you’re buying and are comfortable with it, there should be no reason to sell. I currently have a few bad hypothetical picks in my hypothetical portfolio that haven’t done well at all, but that is because these picks were made during my innitial learning process… a process that I’m still going through. One should learn before jumping in.
I once faced the problem of investing a lumpsum amount from my previous company’s 401k to my vanguard rollover IRA, put everything into the VTSMX, VTIVX and VSGGX at the same time, did not hurt since it was 2004 and the market was going up ever since.
This year faced the same problem of investing my wife’s 401k since her employer decided to pay in all of the employer contribution at the same time if she invested the entire years amount in the first 4 months…this time I tried to dollar cost average by putting in a third of the money in the S&P500 index fund but it kept going lower and in the end, I felt a bit foolish.
Anyhow the point being that neither the gains nor the losses are going to be realised for the next 30+ years since the money is going to stay there for retirement…so dont bother looking at it each day.
Reading this post has sent shivers down my spine. I am a newbie and my greatest fear is seeing my hard earned money evaporate in front of my eyes.
Many years ago I put some money into an IPO and the company dissolved. And until recently I always thought that the stock market is a casino.
After reading articles and blogs such as yours on investing,I had mustered up the courage to invest but have still not opened an online account.
Dollar cost averaging is good and bad, MF expenses eat into any gains you make, and individual stocks are too volatile for newcomer like me.
People say that you should have a longterm view, so does that mean you have to put in your money and forget about it and wake up 5 -10 years later and hope that it might have appreciated 🙁
*windmilling arms*
DOLLAR COST AVERAGING!!! When the market is down, buy more!
NEVER TRY TO TIME THE MARKET! Just ride out the dips and storms and look for long-term growth.
/me smacks forehead. What the heck is this guy reading for financial advice? I can’t believe that he’s incurring all these fees and commissions by moving his money around like this. Geez louise. Does he not realize that he’s now taking even bigger losses than the original $2.6K dip because he’s incurring these charges? That will kill your ROI pretty quickly, faster than the market and you can’t get those fees back when the market rises. Those are sunk costs that are gone!
oy vey.
In response to Jason: at least with a taxable stock market account you can write off your losses, or offset it with any gains upto $3k per year. For your gaming losses at casinos, you cant write any of it off. IMHO, even if you are long term investor, you can still lose lots of money by buying individual companies. With an investment plan in investing in good companies, you can still make money and/or lose money. Look at Yahoo: 100shares of it in July 03, or even 100shares in 1999 (which is a worse scenario), Long term holding…. well, today, yahoo trades near 25. You can lose either short or long term.
I had an even tougher lesson when I first started investing. In the beginning, I succeeded in timing the market, and stupidly thought I could keep on doing so. It becomes that much harder to unlearn a bad lesson when you start off successfully than if you lost $2k right off the bat. I persisted in my market timing efforts for three years (2002-2004). And since this was during a bull period , I convinced myself I was a genius since I never actually lost money in the market. Somehow, despite majoring in economics, ‘opportunity costs’ never quite penetrated my thick skull.
Needless to say, I’m still kicking myself, four years later.
It’s amazing how many people make the exact same rookie mistakes, despite everybody telling us not to. Learning from your mistakes is good, but learning from other people’s mistakes would have been a lot better.
I would suggest trying one of the fantasy stock market sites and play with that for 6months-1year. See if you can handle the swings and manage to avoid lossing your shirt. I was up about 11% until May 2006 (6months) and ready to invest in stocks (in addition to my IRA and 401k) and then everything turned down and I was at 0.8% in one month.
Really opened my eyes, and now my parked at ED for the past 8months doesn’t look like a bad decision.
The problem with paper trading is that you can actually convince yourself that you *can* beat the market. I beat the market with my stock trades for years, even excluding dividends.
Confusing skill with luck can be worse than simply realizing you don’t know what you’re doing.
Some thoughts prompted by some of the comments above-
>the problem with paper trading/games as a learning tool is that is isn’t *REAL* – shrugging off a 15% ‘correction’ in a game is *NOT* the same as investing $100,000 of your hard-earned cash and watching it slowly (quickly) drop to $85,000… and wondering if this is the start of a repeat of the 1970’s.
>individual stock investing is not particularly risking *IF* you adequately diversify. ie. have enough funds to buy 10+ different stocks. If you don’t have enough for this, go with an index fund
>watching daily prices is fine as long as you can view it dispationately – I calculate my net worth daily, just for fun. This does *NOT* influence my long-term asset allocation in my superannuation account (the Aussie version of a Roth IRA or 401K or whatever)
BTW – I’ve just started by own blog (enoughwealth.blogspot.com) if you want to have a look. I think it will be more theoretical than Jonathan’s, and I’ll probably only post once a week or so.
happens all the time….im down like 10% from when i bought in april…(im heavy in emerging markets and plan on keeping it that way)….but over the long term it doesnt matter…
the person was stupid for taking the $ out..should have kept it in..unless, he sold like the next day and locked in some of his gains… (i did..now i bought more for less!!!)
point is….buy and hold is the best way to go for the average joe schmo
My advice for the person discussed in the original post and for other newbies:
1) Read the information on the Motley Fool web site: http://www.fool.com throughly.
2) Go to your local book store and purchase the following books:
– Securities Analysis: Benjamin Graham
– Intelligent Investor: Benjamin Graham
– The Wall St. MBA: Author’s name escapes me at the moment.
Before you buy stocks, you need to learn how to evaluate various securities and the companies behind them (B. Graham books). You also need to learn something about corporate finance, including how to read a balance sheet, peform a discounted cash flow analysis and then calculate the intrinsic value of a company stocks (multiple ways to do this).
Essentially, you need to be able to say: “Well, this stock is trading @ $20/share, but I think it’s worth $25/share, if it drops down to $17/share I’ll pick it up, since the 33% discount amounts to a margin of safety for me”
Factored into that decision needs to be an analysis of how good a business is behind that security in the first place.
If you’re not buying stocks based on that kind of analysis (or some variation thereof) you’re just gambling.
I have a small # of stocks in my portfolio and I don’t buy very many over the course of a year, WHY, because it takes me a long time to evalauate them and come to a decision. BUT, I wind up winning more often than I lose and most of my loses were based on snap decisions. I don’t make huge returns either, but I get a decent return that over time will grow to be huge.
I’m hardly a Guru, there are a lot of things I don’t know and I spend more time learning about the market than I do evaluating stocks. I’m just conservative, I look for stocks that have taken a beating, but have solid cash balances, low debt and high return on equity – that I feel are undervalued.
Forget timing, just invest conservatively, learn as much as you can and hold on to your investments, think year to year, not day to day.
-M
Thank goodness for people like him. If it wasn’t for him, the rest of us would make less money!
Dollar cost averaging is good and bad, MF expenses eat into any gains you make, and individual stocks are too volatile for newcomer like me.
That’s why you buy a low cost (preferably index) mutual fund. Minimum expense, easy diversification.
People say that you should have a longterm view, so does that mean you have to put in your money and forget about it and wake up 5 -10 years later and hope that it might have appreciated 🙁
That’s why it’s called risk. That’s why the reward is higher. If you can’t stand the heat, get out of the kitchen.
All you kids, with your stories. Try this on for size – you are about 3 years out of college, married for about a year, making decent money and being financially responsible, saving what at the time seems like a good amount of money in retirement and non-retirement accounts. Things are good, it’s a nice fall day in October, 1987…
Point is, there always will be ups and downs – I look back to statements from that month and laugh at how little money that was (I’m also amazed at how much I paid for a 200 MEGAbyte hard drive, but that’s another story). As long as you aren’t spending the rent money on the latest Internet IPO, you are better off IN the market than out of it.
I feel the OP did the right thing by going to cash. Now what does he do from here out? If I were him I would wait to at least OCT to try and play the mkt. Summer is always the slow time of the year and there is not a lot of good news right now to drive the mkt. I would also take the time to read up on the mkt and develop a sound investing plan. 3 books that I would highly recommend are :
1) How to Make Money in Stocks-O’Neil Book lays out a sound way to approach the mkt from picking fundamentally strong companies to finding sound entry points. But the most important element is the STOP LOSS discussion.
2) Techincal Analysis of the Financial Mkts-Murphy
This book lays out the basis for understanding technical analysis in more depth than is covered in the first book.
3)Encyclopedia of Chart Patterns- Bulkowski This is for after the first two books and you want to continue learning. There is no better reference to chart patterns and learning to identify your odds of success with trades.
Go back to your entry date and look at what the SPX was doing on the chart. Also I would look at the bounce you mentioned on the July 19 it was a one day bounce back to the 50D EMA and then rolled back over.
No one can time the mkt perfectly but if you stay on top of what the mkt is doing you will greatly increase your odds of being in at the right time.
Lastly have a good set of well defined stop loss scenarios planned out before entering the mkt. That way you already have excepted outcomes if your wrong and can react correctly. Instead of holding and praying or even worse averaging down. Just remeber a stock drops 25% on you, it then has to go up 50% to break even!!!!
Best of luck and good trading to all,
Lee
I jumped into trading back in 99 or 2000 and had something similiar happen. Everyone was making a good amount and I figured, why not me?
I bought a number of stocks, and tried the buy and sell day trader strategy. It worked for a little bit, making 400-800 bucks a trade with under 20k invested and I was stoked. The only problem is it only takes one bad buy and you are left holding the bag because you are afraid to sell at a loss figuring you might miss it when it goes back up.
Long story short, I stopped doing that for 3 years, and this year I just bought and have held most of my stocks (i did the buy and sell on a few but i originally didn’t want to hold onto those long term anyway, wanted to make a little bit and then buy the real stocks I wanted).
But the temptation is just really strong when you login to your stock account and see all the GREEN and you want to realized those gains before they start becoming RED.
As far as stop loss scenarios, I’d be careful of those if the stocks/funds you are buying jump up and down a lot such as energy stocks. I had to learn that first hand. 🙁