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A reader, “Joe,” recently wrote:

I’ve been a traditional saver my whole life (55 yr old). Meaning I never informed myself on investing and put my savings directly into the bank. About a year ago I started to feel like leaving my job (I haven’t) and wondered how long I could live on my savings. . .

Market top?

My dilemma is now after a year of researching investing- it seems most asset valuations are very high.

I keep reading that the Fed and central banks around the world are doing (and will continue to do) everything they can to prop up asset prices. At the same time I’m reading people saying there is only so much juice you can squeeze from a lemon and the market is going to drop big. I don’t know who/what to believe.

My question: Is there a safe way to invest into the market without losing my shirt?

We get different versions of this question frequently. Some, like this one, come from people who put off investing until another day that turned into 20-30 years. Other people are just getting out of debt and ready to start investing. Some were working with an advisor and decided to become DIY investors. Others inherited money, received a lump sum payout from a pension, or had a large portion of their money tied up in homes or businesses which they sold.

Regardless of how you get there, many people reach the same destination. You now have money. You want to invest. Markets are near record highs. 

Investing your money is scary. So what should you do?

Embracing Uncertainty

Every time I receive a version of this question, there is a similar theme: a desire for certainty. I understand that desire. I would love nothing more than to be able to provide certainty.

This desire for certainty is the reason my wife and I initially invested with an advisor. We needed an “expert” to tell us what to do.

The desire for certainty is why we were so hesitant to take control of our own investments. Even after figuring out how bad the advice that “expert” provided was. Even after figuring out that all financial advice comes with conflicts of interest.

That desire for certainty is why Joe, after spending a “year of researching investing,” reached out to me to assure him he wouldn’t “lose his shirt.”

I don’t write this in a flippant or disrespectful way. I write it because it is important to understand we all desire certainty. Unfortunately, certainty doesn’t exist in complex financial markets.

Recently, I wrote about the idea of making decisions with incomplete information. This requires focusing on the decision process, which is completely under your control, as opposed to the outcome, which is ultimately out of your control.

An excellent resource to help make better decisions in the face of uncertainty is Annie Duke’s book Thinking in Bets. David Stein’s new book Money For the Rest of Us covers this topic well from an investing specific perspective.

Still, there is no substitute for experience. At some point, you have to stop researching and start making decisions with skin in the game. 

 Understanding history can help make better decisions.

Recent History Lesson

After a decade investing with a financial advisor, my wife and I started to manage our own portfolio in 2013. The concerns Joe expressed in his email to me were the same concerns we had then as well. 

In May of 2013, JL Collins addressed a similar question from a reader of his blog. If you are struggling with this topic, I encourage you to read his entire blog post Investing in a Raging Bull.

Here is a direct quote from his reader from Spring 2013:

“If I’m am going to start investing for the very first time, is NOW a good time, right before a possible stock market crash?

I have read about us being in a boom and a lot of people seem to think a stock market crash is just around the corner.”

Sound familiar?

Here is a quote from Collins’ response:

“As I sit here typing this afternoon the S&P 500 is trading at 1670, up 14% since the beginning of the year. 27% over the last 12 months. The very definition of a raging Bull Market. Add to this the fact that it has more than doubled since the Spring of 2009.

Whether you are considering investing a new chunk of cash that has come your way or whether to sell and sit on the sidelines for a while, it is times like these that test your core investing principles and beliefs.”

More Recent History

Many of us share the concern about markets that are near all time highs. It’s easy to forget that the market was very turbulent at this time just last year. The S&P 500, Dow and Nasdaq all dropped at least 8.7% in December 2018 alone. Many experts thought the prolonged bull market was coming to an end.

As I sit here typing this, the S&P 500 is trading at 3033. That is 82% higher than it was when JL Collins typed that sentence 6 years ago. It’s about 16% higher than it was at the start of 2019.

Despite warnings that had the writer to Collins’ blog so fearful. Despite Joe reading that “there is only so much juice you can squeeze from a lemon and the market is going to drop big”. And despite warnings in between like this one from financial guru Robert Kiyosaki in 2016:

This is not to imply that markets won’t crash (they will), or that it couldn’t happen tomorrow (it may). It just reinforces the idea that no one knows with certainty when it will happen or what it will look like when it does. 

Bold predictions get people to spend money on books, seminars and advice. These predictions draw eyeballs to TVs and get people to click sensational headlines. Advertising dollars follow those eyeballs and clicks.

Just don’t forget to check if the person who “correctly predicted” the last market crash also predicted 14 of the last 2 crashes. (Extreme sarcasm and skepticism intended.)

Understanding Market History

Let’s get to the heart of what concerns all investors. We work hard for our money. No one wants to take that money, invest it and see the value drop in the ensuing days, weeks or months. 

It’s possible that might happen, and of course that would hurt. So it is rational to do whatever possible to be as certain as we can that won’t happen when investing our money.

Ben Carlson recently examined the relationship between the twelve recessions between 1945 and 2007-2009 and the performance of the stock market around those events. He concluded:

“The problem with trying to time the stock market by calling a recession is that I could give you the exact start and end date of the next economic contraction and you still may not be able to profit from that information. The stock market is simultaneously forward-looking, backward-looking and maybe even sideways-looking so the fall in GDP is never going to line up perfectly with the decline in stocks.”

We tend to fear a big drop immediately after investing our money. This is natural recency bias, given the magnitude of the last market crash in 2008, and even the smaller correction last fall.

But a large drop followed by a rapid recovery is no big deal if you don’t sell at the bottom, whether out of panic or out of need to produce income.

Understanding longer term history of bear markets is helpful. Check out Darrow’s coverage of bear markets in this blog post or get a more detailed take on planning for them in his second book. Karsten Jeske also recently covered this topic in great detail in this blog post at Early Retirement Now.

What to Do?

The reason I decided to turn this reader email into a full blog post is that this topic is too complex to address each time I receive it.

It is not lost on me that I’m over 1,200 words into this blog post, and I’ve given no actionable advice to address the original question — yet.

So what can we do?

Reframe Risk

Returning to our original problem, Joe wrote seeking certainty while dealing with fear. We need to minimize these powerful emotions to accurately assess risk, thus enabling logical decisions.

Stock market investors often use the terms volatility and risk interchangeably. This is the wrong way to approach risk, because it doesn’t factor in how volatility would affect your personal situation.

Investing expert David Stein gave a different perspective on framing risk in our recent Q&A. He said, “… individuals should focus on the personal financial harm a bad outcome, such as a major stock market loss, can cause. In other words, how would your lifestyle be changed if stocks fell 60%.”

Joe has a desire to invest his money without the risk of “losing his shirt.” This requires incorporating an investment plan into a larger overall financial plan.

Investing plan ≠ financial plan

Volatility in the stock market is normal. That volatility becomes a real risk when you sell assets after they’ve dropped in value. One reason you may sell is your need to produce income.

Before putting any money into the stock market, it’s important to assess your needs. Your investment plan should be part of a bigger financial plan.

Do you have other sources of reliable income that would cover your basic needs (social security, pension, an annuity, rental income, royalties, income from consulting or part-time work) or will you be relying solely on investments? 

How much income do you need from your investments and how will you produce that income? Do you need to sell shares to produce income or will the dividends and interest meet your income needs? 

How much of your spending is discretionary? What would it look like to cut your spending by 10% to 20%? Would that mean skipping a few restaurant meals and taking more modest vacations or does it mean you can’t make the rent or mortgage payment?

Two people can have the exact same asset allocation and portfolio size, but completely different risk profiles based on the answers to these questions.

Managing Behavior

The other reason people sell after the market drops is fear. Just like no one knows when the market has peaked until it drops, no one knows when we’re at the bottom until it starts going back up. We need to have systems in place to take emotion out of our decisions.

Writing an investment policy statement (IPS) can be extremely valuable. Here is ours. This is not to suggest that our plan is right for you. 

Creating the IPS creates an opportunity to explicitly state your personal investment principles and rules when you are calm and thinking rationally. You can then refer back to this document and use it to direct your actions when emotions are running high.

When investing a lump sum, it is also important to understand the psychological benefits as well as the potential risks of dollar cost averaging into the market vs. investing the whole sum at once.

Take Action

I’m now approaching 2,000 words, and I’m afraid I still haven’t provided any information that, “after a year of researching investing,” hasn’t already been seen or heard by Joe. Here lies the real problem for most people who write with a variation of this question.

Knowledge is power, but only if you act on that knowledge. At some point, every investor needs to take action with incomplete information.

Darrow and I are DIY investors and planners. This site focuses on helping other DIY investors and planners. 

But not everyone has the interest, ability or psychology to do everything themselves. Some people need individualized financial help

That’s perfectly OK. You’re welcome here too. It is important to be an educated consumer.

When you need help, your best bet is to find a fee-only advisor, preferably one who is paid for advice only. An advisor with Certified Financial Planner (CFP) credentials who works under the fiduciary standard shift the odds of getting good advice further in your favor. 

A good place to start is the National Association of Personal Financial Advisors. If finding good help is overwhelming, Advice-Only Financial can assist you with finding an advisor for a nominal fee.

Providing Certainty

So can Joe start investing in today’s markets without “losing his shirt.” Should any of us be investing when markets are at all time highs?

I don’t know any secret optimal asset allocation. No one can tell you with certainty whether it is better to invest all your money at once or to dollar cost average into the market.

I have no idea what the market will do next week, month or year. I can’t predict what any individual’s behavior will be if investments are performing better or worse than they anticipated.

What I can tell you with certainty is that investing requires making decisions and taking action. Sitting on the sidelines and not making a decision is actually a decision in and of itself.

It is a decision that provides certainty. You are guaranteed to not experience market risk if you are not in the market. This decision also guarantees that you will remain stuck on the sidelines where you won’t experience any upside of being a long-term investor.

So I’ll answer the original question in the headline with another question. Is it ultimately more risky to invest or to stay on the sidelines?

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[Contributing Editor Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris' writing has been featured in MarketWatch, Doughroller, Business Insider and RockStar Finance. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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