Is It Too Late To Invest Now?

Original post here.

One of the more frequently asked questions is whether it’s too late to enter the market now if you have new money to deploy. Reader Tiff is facing that decision and had this to say:

I am in cash position at the moment with about 200k available to invest. Should I jump into the market now or should I wait for a correction? Bulls and bears are both appearing in the news a lot.

You always say in the newsletter that we should just follow the trend and let the market tell us when to exit. But in my case, am I too late to the game? Is now a good time to get in? Or is it always a good time to get in and then follow your trend line to get out?

While I have discussed that topic before, it’s an important one and bears repeating. The issue is obvious in that you risk buying on top of the market, but since no one can give you an answer as to how long this bull will stay alive, or if we are even close to topping out, you need to approach it differently.

When new clients come aboard, I like to use my definition of risk tolerance to arrive at that answer. Assume that you invest your entire amount at this time and the market declines right away (worst case scenario), thereafter leaving you with an about 8% loss after your sell stops have been triggered.

How will that affect you? Obviously, you won’t like it. But can you live with the fact that this is part of investing and that at times you need to take a small loss in order to avoid a big one?

If this is not acceptable to you, start out by investing only 50% and then increase that once the trend continues to the upside. This will cut your risk in half and exposes your portfolio to only a 4% loss.

Still too much? Invest only 1/3, which will reduce your risk even further.

This way, you have a plan in place to evaluate if based on risk factors you are emotionally fit to invest at this particular time. It sure beats trying in vain to determine whether this bull has more legs or not.

If none of these 3 scenarios sit well with you, simply don’t expose yourself to any market volatility by staying in cash, money market accounts or CDs.