Ask HN: Is now a good time to invest in ETFs?
There was a huge drop in all major indices. Is now a good time to invest in exchange traded funds?
1. What is it about ETFs that makes you ask the question? Do you know what an ETF is, what it does, and what other financial products are out there that do similar things and how much they cost (fees)?
2. There are so many resources on the internet. I would say it's good to understand concepts like: Dollar-cost averaging, portfolio diversification, investment horizon, risk aversion. Most introductory investing resources would cover these things.
3. Think about what your short, medium, and long term cash and liquidity needs are to help determine how much you need/want/can invest. Remember, you can probably sell and get some money back, but it could be at a loss.
In summary, one could argue that it's always a "good" time to invest. The questions I would ask are "in what", "how much", and "how long".
For example, a less sophisticated instrument is a stock. Why does a stock have value? What do you get in exchange for money? Why are companies incentivized to care about stock prices? Why are stable companies often devalued if they have less growth potential?
These seem like basic questions, but if you think about any one of these they are not easy to answer.
1. Do you really think the economy is as good as it is in 2018?
2. Do you think we are in the beginning, middle, or end of this outbreak?
3. Will the virus come back after this summer? This is the big question, and depending on this we either have just a deep but short recession, or an almost depression
Answer those questions and you will know. My take:
1. I believe we are at the start of a deep recession. The market have been slow to respond/adjust (they haven't yet fully capitulated)
2. I think NYC is in the middle of the outbreak, while the rest of the country is in the beginning of the outbreak and they are just lagging by 2 weeks and things will get worse
3. This is unknown, but most scientist believe it will return as soon as the social distancing rules are eased. Best scenario is that when it returns, it is in low enough numbers that it could be contained in a way Taiwan/South Korea did (without shutting down the economy). The worst scenario is that it returns back full force, but mutated and more deadly....
Personally, I think the fundamentals are not looking good, as you mention. I'm guessing we're going to finally see the inflation everyone has been expecting since QE#1/2008. We just pumped the monetary supply yet half the country seems to be stagnant. Goods aren't being made, warehouses are being depleted. I think we're in store for shortages and price hikes on labor intensive goods. The strength of the dollar will likely depend on how we fare relative to other countries.
Now, assuming inflation, I would expect some hikes in asset prices(not adjusted for inflation of course), but I don't know what the timing of that would be. Maybe it takes a few quarters for higher prices to translate to higher stock prices? Also, I would think that having unemployment in the 10-40% range would severely reduce retirement contributions and equity purchases by individuals, although I don't know if that is enough to matter relative to the big players like hedge funds and pension plans(and the fed, who might start buying equities for some reason).
There are two more questions to ask, is this already priced into the current market? And, will our social distancing be enough to change our current trajectory?
*Source: https://i.imgur.com/YznALHZ.png
By trying to miss the worst days one generally also misses the best days:
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
* https://www.cnbc.com/2020/03/07/when-you-sell-during-a-panic...
* https://seekingalpha.com/article/4297557
Buy a little every month, rebalance once your asset allocation is more than 5% out-of-whack, and increase bond holdings as you approach your target date.
If you have money to invest in for the long run - now is as good a time as any to start building your nest egg.
If you are trying to "time" the markets, it turns out nobody has a crystal ball and nobody can tell you with any degree of certainty that the markets are going to go up or down tomorrow or next month.
If you are considering "betting on America" I would be all in favor. A 130+ year graph of the Dow Jones is generally trending from the bottom-left to the top-right of the chart.
Another thought on timing: many people believed the markets were way-overvalued before this drop. Makes sense... we've been in one of the longest bull runs ever. Now we have a pandemic on our hands - which many people liken to an event like a war where there is complete uncertainty about the future. Jobless claims jumped within a 2 week period to 3+ million - many people thought that would take 4 weeks or more. We're heading to 20 or 30% unemployment in America. We also have one of the largest stimulus packages ($2tr+) about to rain down on us in the form of never before seen monetary stimulus AND helicopter money. We just dont know whats going to happen here. Cheap rates for the last decade has fueled over $7tr in corporate debt. Now companies cash flows have ground to a halt. If we start seeing a growing domino effect of bankruptcies, you can expect this market to drop another 30%. Its a bit of a doomsday scenario - but then again, nobody thought we would be HERE 4 weeks ago - and we are.
Yes, stocks do look cheap - but dont catch a falling knife.
Make sure you research your ETFs and what they are tracking e.g most of the Vanguard ETFs (e.g. VOO, VTI, BND) are quite reliable but if you are investing (and not day trading) avoid leveraged and inverse/short ETFs such as SPXU and TQQQ. They may seem attractive now but they are based on derivative products so their pricing is subject to a number of factors.
However, if one had a million dollars sitting in the bank, it may not be prudent to dollar cost average. Portfolio management and a time horizon are necessary to achieve the desired mix
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Timing the market for the "best price" is almost impossible.
There’s a hypothesis that there’s a “passive investment” bubble. By some estimates, about 20% of the market is fueled by passive investment strategies and at a certain point, it divorces asset pricing to true fundamentals. I don’t know the transmission of this, but it makes sense- just like investors flock to the wrong ZOOM stock to inflate the price of a wrong stock, too many people passively buying ETFs has the downstream effect of people buying too many shares of something that isn’t valued properly.
https://fortune.com/2019/09/14/passive-investing-stock-marke...
Market is driven by 30% fundamentals, 70% herd psychology(technicals try to capture some of this). Keep that in mind when you evaluate answers here.
Longs want you to join the market to make their assets safer. Shorts and those who are on the sidelines, want to time the market by half a standard deviation; so, they want you on their side in order to break the price support of any ETFs/indices, etc.
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
Generally if you try to get out to miss the worst days, you generally end up missing the best days as well:
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
Even if ended up investing at the top of the market, i.e. just before a major crash, you generally still end up in an okay position as long as you do not panic and liquidate your position:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
So: each month put in whatever you can afford ($100, $1000, whatever) into an index fund (Russell 3000) and bonds depending on your risk tolerance and forget about it. If you have access to a 'target date fund' that'd be good too.
The above three weblogs are good if you're into personal investing.
Also: for equities, probably best to go with a total market things that track something like the Russell 3000:
* https://www.pwlcapital.com/should-you-invest-in-the-sp-500-i...
* https://www.marketwatch.com/story/vanguard-thinks-its-own-em...
Also, assuming you're American, having some international exposure to avoid home country bias wouldn't be a bad thing:
* https://www.etf.com/sections/index-investor-corner/swedroe-h...
Passive ETF investing is like saying "I don't have an opinion as to which company will perform the best, so I am going to invest in all of them and be content with getting the average return of some index". Dollar cost averaging is like saying "I don't know if the market is overvalued or undervalued right now, so I am going to spread my investments out over time and be content with getting the average returns of the market over the next X number of years (where X would ideally be something like 20 to 30 years)."
[1] https://ssrn.com/abstract=3465888 [2] https://www.bogleheads.org/wiki/Bogleheads®_investment_philo...
No real answer to this though. You can get ETFs that go against major indices, you can get ones that track it, or many other types.
If you want to attempt to be smart (it rarely pays to try and time the market) I would wait a couple more weeks, end of April is probably when the market will most likely reflect the reality of what our economic outlook is. Trump & the Fed have been doing a good job propping the market up with confident words and cash injections for the last weeks. Again trying to time the market is usually a fools mission.