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Q&A: "I'll Be 53 in May and Have Many Conservative Investments. Where Am I Going Wrong? Too Afraid of the Stock Market Right Now?"

Investment

Question and background: 

I'll be 53 in May. I have my home paid for approx value @ 240K conservatively. 125k in a trad IRA in CDs get less than 1%. 135K in cash getting 1%, 13K in a 401K getting 1.2%. No car payments/no bills other than utilities. Where am I going wrong? Too afraid of the stock market right now?

Answer: 

Well done on getting to your current financial position!

Allow me to ask...what makes you think you are "going wrong?" Is it because everybody's been having a party in the stock market the last couple of years while cash is earning a goose-egg, and you feel like you're missing out? Though it's painful to feel out-of-sync, you may well be one of the few prudent investors out there. 

You would be well-served to hire a good financial advisor, preferably a CFP®, to review your entire financial picture (retirement, investment, tax, risk management through insurance, estate matters) and make sure it's aligned with your financial priorities. Find one who will charge you a fee for advice instead of selling you financial products. You need to know what you're saving for and how much you'll need.

But beyond that, I think you have every reason to be afraid of the stock market at its current overvalued levels. That's a minority view, by the way...most advisors bad-mouth "market timing." And it's absolutely true that nobody can precisely and consistently time the markets. But that doesn't mean you should ignore the investing environment when valuations are at extremes, like today. Thankfully, investment success doesn't depend on having precise timing...investors who can largely avoid catastrophic losses while capturing modest gains tend to do quite well over the long haul. 

Even if (by some miracle) we don't have a significant correction or two over the next several years, history shows that when stock valuations are at these elevated levels, average net returns over the next 7-10 years tend to be very low (1%-3% for example). And that assumes you hung on through the corrections without panicking and selling!

The US stock market has been on a tear for five years with very little in the way of normal, healthy pullbacks. Corporate profits are well above their normal trend. By several measures, global growth appears to be slowing. Both bulls and bears can trot out their "reasons" for why the market must do this or that. 

Can the stock market continue to climb from here? Certainly. But my own view is that future returns in stocks have been "pulled into the present."

Even bonds and real estate investment trusts (REITs) are susceptible at current levels. Bonds of various types have been in a long-term bull market, with interest rates in decline over about 30 years. That doesn't mean that interest rates will immediately begin a rapid climb. But it does mean that current yields are historically low and, when interest rates do start climbing in earnest bond principal will get hit. 

So what's an investor to do?

There's no precise way to approach this. I'd encourage you to wait to invest in stocks (stock funds) until after a market correction, when they can be had at much better prices than today. But instead of waiting for the 40%-50% "train wreck" that may never come, you may wish to wait for a 15%-20% pullback and invest then. Stocks could certainly still drop from there, but you'd potentially be that much ahead vs. fully investing for growth today. 

Another thing...obviously you don't have to invest it all at once. You could "average" your way into the markets by investing a certain amount each month or quarter.

Finally, consider hiring an advisor who manages portfolios for clients, one who shares your concern and won't immediately invest your cash at the market's current level.