- Despite talk of a coming market correction, E-Trade found 31 percent of those 25 to 34 years old plan to move some cash savings into equities.
- A Dow Jones Index above 22,000 seems expensive today. But will it in three years' time?
- It's reasonable for those near retirement to look at the current market with skepticism. Instead of cashing out, though, return to your asset allocation.
With the market reaching all-time highs, it's certain a correction will happen at some point in the future. That shouldn't scare you off from investing today.
No matter how you slice it, the market has become expensive. The current price-to-earnings of the has reached 24.7 times, far above the historical mean of 15.7. The 18.8 times forward P/E is greater than the 20-year average. Meanwhile, the Dow gets ever nearer to surpassing 23,000.
Beyond the price tag, there are a myriad of reasons the eight-year bull-run could get derailed, whether it's a stand-off with North Korea, continued weather catastrophes or a general lack of cohesion in Washington. Beyond the macro dangers, even some microeconomic indicators signal early warning signs to Wall Street, such as a 4.8 percent decline in July housing starts.
If a correction were to come, it could have dramatic impact on savers. But it's not keeping them away. Despite the global concerns, E-Trade Financial recently surveyed its investors, finding that 31 percent of those 25 to 34 years old planned to move some cash savings into equities. That's not only a brave move, it's the smart one for your long-term financial health.
It's easy to throw cash into the market when it's on the rise. But as that momentum slows, don't fall for one of the oldest investing mistakes: trying to time it.
"Market timing, whether you get in or out at the right time, is the most destructive thing you could possibly do," said Mark Matson, CEO and founder of registered investment advisor firm Matson Money.
Yet, as the threat of a correction strengthens, the urge to time the downswing will become more pronounced.
For younger investors, such as the millennial set, it's understandable if they're nervous jumping into the market for the first time. It goes against the "buy low, sell high" speak that permeates investing basics. But when evaluating long-term strategies, such as retirement savings, then it shouldn't enter the equation.
Certified financial planner Chad Carlson deals with this conversation almost daily, and he admits to his clients that a Dow Jones Index above 21,000 seems expensive today. But then he asks if it will seem expensive in three years? Maybe. What about five years? Or, 20 years?
To put the Dow price in perspective, calculate what its growth would be with a 7 percent yearly average rate (the historical growth rate) over the next 20 years. At its current price, you're looking at a Dow that's over 84,000. Now the current level looks like a steal.
Or if you want a more recent example, those who were worried getting in before the 2008 recession may have felt the S&P 500 Index price tag of 1,549 in October 2007 seemed expensive. Even including the deep decline during the recession, it has increased 60 percent since that 2007 mark.
"Start plugging away monthly amounts," said Carlson, an owner at wealth advisor Balasa Dinverno Foltz. "Don't just try to chase performance."
The other reason it's the right time to buy in: market drops provide cheap shares.
The worst decision someone could have made during the most recent recession was moving funds out of the market near the bottom for fear they would continue to lose more. Those who stayed in saw their savings return to pre-recession levels within about two years.
Those who left missed the opportunity to buy discounted shares of the funds they invest in. By staying in, they would have bought fund shares at a cheaper price, building the amount in their portfolio, which would then benefit them once the market turned back.
"Essentially you got a coupon to use towards your long-term retirement purchases," Carlson said. "As a [long-term] saver you would love to have a correction to happen, because you can buy cheaper."
Not everyone has a long time horizon to work with. It's perfectly reasonable for those nearing retirement to look at the current market with skepticism. You don't want a major blow to your savings right before you step away from the job.
Instead of cashing out, though, return to your asset allocation. If you don't want to face the risk of having 100 percent of your savings in equities, then it's likely you should reduce the overall risk profile of your portfolio. This would mean moving a portion of your savings into fixed income, such as highly rated bonds.
"To the extent you can't take the boatload of risk, you need to offset the risk with short-term fixed income," Matson said.
For example, if you're nearing retirement and have half of your portfolio in equities and half in fixed income, you can still take advantage if the market falls. Say there's a 40 percent drop in large cap equities; your fixed income, which has more stability than your equity exposure, should perform well.
"Then sell off the fixed income, because your portfolio is under 50 percent of equities" due to the price changes in your stock and bond holdings, Matson said.
It gives you the chance to buy more equities at the discounted price without hurting your portfolio's overall risk level. Plus, you don't have to predict the market's fluctuation, added Matson.
The strategy provides some comfort in a time of unease.
— By Ryan Derousseau, special to CNBC.com