Bad time to invest in equities?

[Dr Mike Oxgreen]

I’m about to invest a chunk of inheritance money by opening a Fidelity investment account and putting the money into a selection of index tracking funds.

But I’m very conscious of the fact that both the FTSE and the Dow Jones are currently trading at their all-time highs. My suspicion is that the stock market is a little over-excited* at the moment and is due a mini correction.

I’ll be investing for the long term so arguably it doesn’t matter too much, but it would be a pity to put a load of money in only to see it drop 5% straight away.

So what should I do?

• Put all the money in at once and not worry about it,
• Wait a week or two to see if we get a correction, and put money in once things have settled to a more sensible level,
• Drip-feed the money in over the course of a few months?

* A friend of mine who spends a lot of her time trading equities thinks that traders should be forced to have a wk every morning before starting work, to calm them down a bit. She may have a point!

[Dr Mike Oxgreen]

Thanks folks!

A drop of 5-10% isn’t enough to worry me; it would just be a pity, that’s all. But you’re all right that it’s impossible to know when the correction might come, so perhaps it’s best not to be too concerned about it.

I think drip-feeding over 6 to 12 months is what I’ll do, and make use of “pound cost averaging”. It’s reassuring to hear that investing at all-time highs has not historically been a problem.

[Dr Mike Oxgreen]

rdjohn said:

I suppose that it is worth pointing out that with inflation of 3% and interest rates about 1% you will lose 2% if you do nothing.

That is a very good point. The money is currently spread between four instant-access cash savings accounts (to keep within the protection limit of each account), and it is therefore shrinking. Also, I will shortly start paying tax on the interest they’re paying, which effectively means it’ll shrink even faster. All of this is incentive to get into the market reasonably quickly.

In the medium term I will be cashing out £40k a year and re-investing it into Mrs Oxgreen’s and my ISAs, so hopefully we’ll end up tax-efficient after a few years.

rdjohn said:

Your horizon is way into the future, so you may well be invested through several corrections, but will tend to come up smelling OK, in the long term.

That’s correct. Mrs Oxgreen and I are currently mid-forties, and hoping to retire by 60 (or earlier if things go really well). The majority of the money will be earmarked for retirement, but with a “pot” of spending money for holidays, treats and home improvements that we would look to make last until we’re around 60. I might try and identify a fund for this money that gives solid, unexciting steady growth for the medium term.

rdjohn said:

I suppose another thing to be wary of is management fees. Paying an IFA just 1% to ”actively manage” your fund may seem attractive. However, over 25-years, it can turn out to be quite a tidy sum and in reality, may turn out to be no better than a diverse fund like those that Vanguard offer.

Absolutely! We went to see an IFA a week or so ago, and he wanted 0.75% to manage our entire portfolio, which would be several thousand a year. I decided that I feel confident enough to invest the money myself and I don’t imagine that he’d have produced that much more than I can myself. Once we’re fully invested, Fidelity will be charging 0.2%, which is considerably better.

So I have now opened an investment account with Fidelity, and I’ve put the first blob of money into it. I chose five index trackers (FTSE, American, European ex-UK, Japan, and Asia ex-Japan). I also chose a managed fund (Fidelity Special Situations, which has historically done well), and also a property-based fund. Of course, the market has fallen a bit in the last few days, so the decision to pound-cost-average my way into the market is looking reasonable. Will see how things go!

[Dr Mike Oxgreen]

xeny said:

If you're talking about that much money, is there a particular reason you didn't choose a fixed fee broker?

Erm... only because I’m not really familiar with that option. But ultimately I think I have re-learnt what I’ve always known: you can invest quite successfully yourself without knowing much about it and without taking paid-for advice or paying someone to manage your investments for you.

The one thing I will be paying that IFA to do is to work out whether I should take cash-equivalent transfers from two deferred final-salary pensions, because I’m not confident that I know how to judge whether the transfer values they offer are good enough. Unless someone can direct me to a friendly web site that could teach me the basics of that, in which case I might not even need to pay for that!

Edited by Dr Mike Oxgreen on Friday 19th January 11:42

[Dr Mike Oxgreen]

Just thought I’d come back to this thread.

Well, well! What a ride it’s been since I posted! Little did I know that I was starting this thread right at the beginning of a fairly big correction. Let’s hope it is just a correction and not the start of a sustained bear market - most experts are saying so. Underlying economic indicators are good-ish.

I started investing pretty much immediately, and have been pound cost averaging by putting in a chunk of money about once a week, and intend to continue.

And the strategy appears to be working. Since I started:

FTSE: Down 7.8%
Dow: Down 7.5%
Nikkei: Down 9.8%
Me: Down 5.0%

Not too bad. Just goes to show that pound cost averaging really does insulate you from some of the losses in a falling market. Of course, if the market had risen then I’d have missed out on some of the gains, but I’m comfortable with that.

Having said that, I did write...

Dr Mike Oxgreen said:

it would be a pity to put a load of money in only to see it drop 5% straight away.

Edited by Dr Mike Oxgreen on Friday 9th February 09:59