7 ms·

When the market takes a dive is the best time to invest in index funds. The problem comes when people panic and pull out their money in a recession, realizing

When the market takes a dive is the best time to invest in index funds. The problem comes when people panic and pull out their money in a recession, realizing the loss. If the market rebounds you come out ahead and if it doesn't, you've got much bigger problems. The best policy is to put money in the market every month, through the best and worst of it, especially if you're young.

paganel 10y ago
> The problem comes when people panic and pull out their money in a recession, This doesn't happen only because of panic. In a recession, by definition, bad things happen: people lose cushy jobs, they end up uninsured just before an illness happens, very close relatives (parents, kids) fall on hard times them-selves and you have to bail them out etc etc. All these new problems require liquidity, which can be very easily obtained by selling your stocks, even if at a loss. Multiply this across the whole middle-class and the end-result won't be pretty.
- mason55 10y ago
  Which is why a liquid emergency fund is the first recommendation for anyone trying to secure their personal finance situation.
  - paganel 10y ago
    I agree with you, but, then again, saving money "under the mattress" or a high saving rate is usually frowned upon in the economic press.
  - ihsw 10y ago
    Many treat credit cards as their liquid emergency fund. Unexpected expense? Dig yourself deeper and push your credit closer to its limit. Personally I think that is the intention of credit cards -- emergency liquidity -- and that nobody should carry credit card debt to the next month.
    - ryangittins 10y ago
      This is absolutely a valid use for credit cards if you're careful and disciplined, but it can only stretch you for a maximum of one month before you've got to start making payments. What about when you're out of a job for six months? You've gotta have an emergency fund.
- ryangittins 10y ago
  Fair point; this stuff certainly doesn't happen in a vacuum. I should have mentioned that investing comes with the caveat that one should also have a plan for major life events like a job loss. Having 6+ months of living expenses on hand in cash is a must. I firmly believe that 70%+ of the stress and anxiety of losing one's job is the pressing need for cash flow. I can't imagine the kind of stress that produces for someone who lives paycheck to paycheck. That brings me to a larger (slightly off-topic) point: people don't save enough money. 10% is the absolutely minimum one should be saving, despite that being the common advice which no one follows. Most people, even high-earners, spend nearly all of their money. There are tons of people out there making $75k+ per year who are a couple paychecks from being on the street. Those people are simply doing it wrong and will absolutely get bit in a down market. For those still reading, do this: Get an emergency fund that you can live on for 6+ months. Pay off your debts. Contribute to your IRA, 401k, or whatever else, putting all of that money into a boring index fund that tracks the market (I like VTSAX because Vanguard's fees are incredibly low). Make sure at least 20% of your money is invested. The only people who this might not work for are those earning at or near minimum wage with dependents. If you're not in that group, just do it. You do not need that 20% of your money right now. You may think you do, but you don't. You're spending money on stuff you don't need. My apologies for getting so far off topic. This is just something I feel very passionately about.
  - ececconi 10y ago
    I don't see the difference between having cash on hand and having stocks. You can sell on the market five days a week. Add multiple credit cards with a very high credit line on them you effectively have about 30 days to sell stock from the emergency point. Why keep stocks over cash? Even if they don't appreciate, or even if it is a down year, they still pay dividends which can be reinvested.
    - ryangittins 10y ago
      Consider this scenario (which is not out of the realm of possibility): You stick $10k in the market when shares are $10 each. This means you get 1000 shares. Then the market crashes and now those 1000 shares are worth $5k. Normally this would be fine; you know the market will rebound eventually. Then you lose your job and have no cash on hand. You're out of the job for a few months, and you slowly sell your shares until you find a new job. Say it takes $4k to keep you afloat for a few months. You now have $1k left in the market, 200 shares. That $4k of spending actually cost you $8k. Though the market rebounds eventually and your remaining 200 shares are worth the $2k they originally were, you're still $8k short and you always will be. That money is gone. It would've taken more than 20 years for inflation to turn $8k in cash into $4k. In short, cash is a cheap hedge against some bad luck eating up your investments. The inflation that slowly devalues your cash is a much more acceptable risk than the one I describe. Markets can be rough in the short term. It's easy to hedge against them. Do it.

paganel 10y ago

> The problem comes when people panic and pull out their money in a recession, This doesn't happen only because of panic. In a recession, by definition, bad things happen: people lose cushy jobs, they end up uninsured just before an illness happens, very close relatives (parents, kids) fall on hard times them-selves and you have to bail them out etc etc. All these new problems require liquidity, which can be very easily obtained by selling your stocks, even if at a loss. Multiply this across the whole middle-class and the end-result won't be pretty.

mason55 10y ago
Which is why a liquid emergency fund is the first recommendation for anyone trying to secure their personal finance situation.
- paganel 10y ago
  I agree with you, but, then again, saving money "under the mattress" or a high saving rate is usually frowned upon in the economic press.
- ihsw 10y ago
  Many treat credit cards as their liquid emergency fund. Unexpected expense? Dig yourself deeper and push your credit closer to its limit. Personally I think that is the intention of credit cards -- emergency liquidity -- and that nobody should carry credit card debt to the next month.
  - ryangittins 10y ago
    This is absolutely a valid use for credit cards if you're careful and disciplined, but it can only stretch you for a maximum of one month before you've got to start making payments. What about when you're out of a job for six months? You've gotta have an emergency fund.
ryangittins 10y ago
Fair point; this stuff certainly doesn't happen in a vacuum. I should have mentioned that investing comes with the caveat that one should also have a plan for major life events like a job loss. Having 6+ months of living expenses on hand in cash is a must. I firmly believe that 70%+ of the stress and anxiety of losing one's job is the pressing need for cash flow. I can't imagine the kind of stress that produces for someone who lives paycheck to paycheck. That brings me to a larger (slightly off-topic) point: people don't save enough money. 10% is the absolutely minimum one should be saving, despite that being the common advice which no one follows. Most people, even high-earners, spend nearly all of their money. There are tons of people out there making $75k+ per year who are a couple paychecks from being on the street. Those people are simply doing it wrong and will absolutely get bit in a down market. For those still reading, do this: Get an emergency fund that you can live on for 6+ months. Pay off your debts. Contribute to your IRA, 401k, or whatever else, putting all of that money into a boring index fund that tracks the market (I like VTSAX because Vanguard's fees are incredibly low). Make sure at least 20% of your money is invested. The only people who this might not work for are those earning at or near minimum wage with dependents. If you're not in that group, just do it. You do not need that 20% of your money right now. You may think you do, but you don't. You're spending money on stuff you don't need. My apologies for getting so far off topic. This is just something I feel very passionately about.
- ececconi 10y ago
  I don't see the difference between having cash on hand and having stocks. You can sell on the market five days a week. Add multiple credit cards with a very high credit line on them you effectively have about 30 days to sell stock from the emergency point. Why keep stocks over cash? Even if they don't appreciate, or even if it is a down year, they still pay dividends which can be reinvested.
  - ryangittins 10y ago
    Consider this scenario (which is not out of the realm of possibility): You stick $10k in the market when shares are $10 each. This means you get 1000 shares. Then the market crashes and now those 1000 shares are worth $5k. Normally this would be fine; you know the market will rebound eventually. Then you lose your job and have no cash on hand. You're out of the job for a few months, and you slowly sell your shares until you find a new job. Say it takes $4k to keep you afloat for a few months. You now have $1k left in the market, 200 shares. That $4k of spending actually cost you $8k. Though the market rebounds eventually and your remaining 200 shares are worth the $2k they originally were, you're still $8k short and you always will be. That money is gone. It would've taken more than 20 years for inflation to turn $8k in cash into $4k. In short, cash is a cheap hedge against some bad luck eating up your investments. The inflation that slowly devalues your cash is a much more acceptable risk than the one I describe. Markets can be rough in the short term. It's easy to hedge against them. Do it.