Not even the billionaire investor Warren Buffett could tell us with any sort of precision whether this was the right time to buy. But market dips can be a good time to start investing, as long as you are allocating your money in a prudent way that will help you achieve your long-term goals.
To start, it helps to define those goals.
Are you investing money that you want to grow to pay for your child’s college — five years from now? Eighteen years from now? Or for your retirement?
The time frame makes a difference because many financial planners don’t recommend investing money in stocks if you will need that money imminently, or generally within five years.
If you aren’t comfortable plunking all of your money in the stock market at once, consider investing on a consistent schedule over time. Investing at regular intervals allows you to automatically take advantage of dips in the market.
Going over all of this with a trusted financial planner — one who pledges to act in your best interest — can be a wise investment. As my colleague Ron Lieber wrote in his column last week, there has never been a better time to hire help, even if it’s just to help you come up with a plan that you want to do on your own.
Do Presidents Drive the Stock Market?
I have 35 percent of my defined contribution plan invested in a United States stock market fund, 25 percent in a Canadian stock fund, 20 percent in an international stock fund and 20 percent in a money-market fund. I’m 15 years from retirement. Is this the right mix? — A reader in Canada
There are no right answers here — but there is probably a strategy that is right for you and your unique circumstances. Generally speaking, how you choose to allocate your investments among stock, bonds and cash should be in keeping with your overall goals, age, time horizon and stomach for risk. A diversified portfolio of inexpensive stock and bond funds, both domestic and international, is typically a good place to start.
Precisely how you divvy it all up is a highly personal decision. Consider this thought exercise when thinking about how much you want to invest in stocks.
Figure out the total amount you have invested in the stock market now (as opposed to money in bonds in cash). Then think about what you would do if that pot of money lost 10 percent of its value. What about 20 percent? Would you be willing to sit tight and remain invested?
If the answer is “no,” you may be invested too aggressively.
On the other hand, if you expect to live another quarter-century in retirement, you want your money to grow enough to at least keep pace with inflation.
If you want to see how your current allocation compares with what a professional might choose, you can also look under the hood of a target-date fund — a mutual fund whose mix of stock and bond investments gets more conservative as it approaches a target retirement date.
In your case, that would be somewhere between 2030 and 2035. (Just keep in mind that some of these funds are more aggressive than others. So look at funds from, say, Vanguard, Fidelity and others to get a better feel for how they vary.)
How does it affect the housing market? — A reader in Grover Beach, Calif.
The stock market’s gyrations are not likely to have a tangible effect on the housing market — at least not right now, according to Mark Zandi, chief economist of Moody’s Analytics.
If the market’s overall slump is limited to the roughly 10 percent decline from its peak, Mr. Zandi doesn’t expect any changes. Stock prices are just back to where they were at the start of 2018. But a more significant stock market drop could change the sentiment toward the housing market. As people’s savings and investments decline, they often become less willing to buy a home.
“If stock prices keep dropping, say 20 percent, and stay down, then it will sap the energy from the housing market, particularly at the higher end of the market,” Mr. Zandi said. He added that shoppers for higher-end homes are already trying to digest the changes that came with the new tax legislation, which, for example, limits the deduction on mortgage interest. A meaningful market dive could also dampen enthusiasm within the vacation home market.
“So no big deal so far,” he added, “but the script is still being written.”
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Should I shift my 401(k) portfolio to bonds right now to stop taking major stock market losses? — A reader in Santa Cruz, Calif.
Is the best long-term strategy to just hang in there? — A reader in Potomac, Md.
Trying to time the market is a bad idea because you have to get two things right.
First, you need to know the right time to sell your stock investments, ideally when they’re flying high. Then, you need to divine the best time to reinvest your money.
Even the most experienced stock-picking professionals rarely get it right — at least consistently and for long periods of time. That is why buying a collection of diversified index funds and holding them is the best strategy for most investors.
Look at what happened on Monday. If investors sold their stock funds when the market was dropping, that may have felt like the right thing to do in the moment. But if those investors regretted their decision and tried to reinvest on Tuesday — when stocks started to stage a recovery — they would have locked in their losses.
A retired couple I wrote about in 2012, and who suffered significant losses during the market plunge of 2008 and 2009, provides a good example. The couple’s retirement portfolio, which was evenly divided between stocks and bonds, lost 25 of its value from the market peak preceding the drop in 2008 and 2009. But the portfolio recovered within a few years.
I’m planning to retire in three years. I moved 95 percent of my holdings to stable bonds two years ago. What is the outlook for the bond market? — A reader in New York
It’s hard to make any sort of prediction for the bond market over all. But investors tend to get nervous when interest rates tick higher and bond prices usually fall in response. Existing bonds become less valuable because investors can buy a new one with a higher coupon.
To get a sense of how your own bond funds may react to rising rates, take a look at their duration. The duration generally measures how long it will take to receive all of your money back, on average, from interest and your original investment.
If interest rates rose a full percentage point, a fund like the Vanguard Total Bond Market Index Fund, which has an average duration of 6.1 years, would decline by about 6.1 percent. But since the fund also pays investors income, it would post a total loss of roughly only 3.0 percent. And the yield would eventually increase, helping to mitigate the loss.
For this reason, some investors tend to favor shorter-duration bond investments when rates are on the rise. Such investments are less sensitive to interest rate fluctuations.
Regardless of where rates are headed, bonds serve as an important ballast to stocks in investors’ portfolios. And high-quality bonds — including those issued by federal, state or local governments, government agencies or healthy companies — tend to perform better than lower-quality bonds during times of stock market turmoil.
“Higher-quality bonds have tended to hold up better in equity market sell-offs,” said Fran Kinniry, a principal in Vanguard’s Investment Strategy Group. “This was true again yesterday, with high-quality outperforming low-quality bonds.” On Monday, he said, those bond prices rose 0.20 percent to 0.60 percent.
“A stay-the-course message on bonds,” Mr. Kinniry added, “is extremely prudent.”