After the best month of January on the stock market since 1997, all indexes continued to roll. February was a great month as well and March continued to push the stock market to higher levels.  But the market started to become a bit shakier in March and this continues in April. I didn’t look at the volatility index lately, but I feel that there are more emotions involved in trading lately.

 

Currently Sitting on the Sideline

 

At the beginning of the year, I listed 3 dividend investing goals:

#1 Adding a “stable” dividend growth stock (most likely from the consumer sector) I bought Apple

#2 Increase my existing positions through Dividend ReInvestment Plans (DRIP) Not done yet procrastination at its best!

#3 Invest 10% of my portfolio in a US index ETF. Currently sitting on the sideline

 

I currently have $3,200 sitting in cash in my account plus another $700 invested in a US index mutual fund. This is my cash to buy my US index ETF. In theory, buying an ETF should take a big 2 minutes at most to register the trade and achieve a second goal for my year. However, for one of the first time in my trading history, I’m hesitating.

 

I’m currently accumulating dividends paid in cash in my account and waiting to see what is going to happen on the stock market. I’m weighing the pros and cons of hitting the market or not with my liquidity.

 

Pros

 

The stock market is at its highest level ever. This should be a bad sign that would lead me to wait until there is a 10-20% correction. However, stocks’ P/E ratios are currently undervalued compared to their previous high back in 2007. Interest rates are way lower which contributes to companies’ growth. Finally, the dividend yield is higher than 10 year treasury bills. These three factors have me holding onto my current position and push me towards investing more money in the stock market.

 

But it’s not all that easy; there are some severe cons…

 

Are We Heading Towards a Correction?

 

The first sign the market is “sick” is that Wall Street definitely counts on the FED to continue pumping cash into the machine. It’s like having a leaking engine and shoving more oil inside instead of solving the problem. Sooner or later, you will lack oil and the engine may break instead of slowing down.

 

Then, what happened in Cyprus made me realized that banks may fall under an all new set of rules if things go sour. We may not be the first to be affected but the movement will surely come back faster than a boomerang if bigger countries with difficulties (such as France!) look at other possibilities to pay off their debts.

 

The third factor is seasonal. It almost sounds like storytelling but spring is usually pretty slow for the stock market. In the past 3 years, we hit a correction during that period of the year. What’s the interest of buying an index when we are at the highest level and are on a verge of a 10% correction?

 

Trading Options

 

I can see two options to my situation right now:

 

#1 Investing my cash in a money market fund earning 1.25% and wait for the correction

 

#2 Invest right now and live with the consequences (good or bad)

The risk when you weight your option is that you have a 50% chance of making the wrong decision. Therefore, if I sit on the sideline and the market goes up by another 10% by the end of the year, I will still face the same debate (invest or wait for the correction that is even more eminent!) and will have left $400 on the table (10% of $4,000).

 

On the other hand, if I buy the index today and there is a market correction in the next 3 months, I will tell myself: I knew it! and will lose roughly $400. This is why I am hesitating so much…

 

Whats worse to you: leaving $400 on the table or losing $400 when taking a chance of making money?

 

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13 Comments   |  

13 Comments

Matt
April 15, 2013, 5:12 am

Option #3: Sell a put for one of the stocks you like at a lower strike and get paid to wait while avoiding the risk of buying now and watching the price decline.

April 15, 2013, 5:35 am

We probably are heading towards a correction. But I have no idea when that correction will happen. So I keep trying to pump some money into investments every month. Yes, there will be times where if I had only waited a few months I could have bought the stock for a lot less money, but you only find out about these kinds of things after the fact.

April 15, 2013, 9:00 am

I think there’s little point in agonizing over what the stock market will do in the short and medium term. No one can do this and be right often enough to make money! With stocks, you’re either in, and stay in, or you’re out, and stay out. Just my 2 cents.

April 15, 2013, 12:27 pm

I’d rather leave it on the table. We already went up a bunch this year and I’m very happy with that. I’m keeping it on the side for now.

Mike
April 16, 2013, 8:21 am

@Matt,
not a bad idea, I’ll check into this strategy :-)

@My Financial Independence Journey,
I’m under a monthly investing plan for my kid’s account and it’s probably the best way to go. I don’t wonder if I should buy or sell each time I feel the market overheat. I just keep buying each month! Good strategy.

@Kurt,
I agree with you but my problem is more with the “new money”. I’ve invested half of my RRSP (pension) contribution in January and I’m waiting since then for the other half…

@Retirebyforty,
I know, this is very tempting! On the other side, if the market keeps going up, I’ll beat my head against the wall ;-)

April 16, 2013, 10:41 am

As with Kurt, you can’t time the market. Currently, I’m “all in”. In addition to an 80% diversified dividend portfolio, I’ve also put 20% into bonds that yield a hair over 3.5%. The bonds currently trouble me more than the stocks, but I’ll keep a close eye on the QE situation. Obama is playing politics there, and doesn’t want the bond market to take a big hit prior to the 2014 election.

As an ending note, if you go back and truly study the “sell in May and go away”, you will find the folks with the biggest portfolios held fast and stayed the course. Buy good low-beta dividend stocks, diversify across all sectors of the market and you’ll be able to sleep at night.

HD
April 16, 2013, 4:14 pm

My goal this year was to increase my US exposure and buy an S&P 500 ETF(ZSP). I was hesitant as well due to the same concerns.

I opted for option #2.

If it does correct, I will rebalance. As simple as that.

April 17, 2013, 6:55 am

[…] The Dividend Guy made a timely post earlier this week about an upcoming market correction. Hopefully he was able to wait this one […]

April 17, 2013, 8:43 am

I would invest your 3200$ in the US ETF in three separate trade over three months. You will market average and avoid trying to predict the future. That’s what I would do. In the end, to collect dividends, you have to be in the market.

April 17, 2013, 11:51 am

The real question is, do you feel confident that the investments you are making today will deliver more earnings and dividends over the next 20 – 30 years, thus making them more valuable OR NOT?

I feel confident that the majority of companies I own will be worth more 20 – 30 years from now because they will be earning more, and as a result will pay me more in dividends. I would advise you to turn off CNBC ;-)

richard weinstein
April 22, 2013, 1:14 pm

Always read your articles. Frankly, I a holding a rather large chunk of chash on the sidelines in case a great buying opp. comes my way – like a crash or major correction. Considering how crumy the economy is (I don’t believe the governments reports about a rebounding economy)I am scared that a very major something or other is in the works – manbe a crash or major correction. Too many stocks are just too high to make any sense. Good luck to all! Frankly, I am starting to feel like a professional gambler not an investor.

April 27, 2013, 2:07 am

[…] Guy @ The Dividend Guy Blog wonders if We are Heading Towards a Market Correction, and should buy or risk missing […]

April 27, 2013, 4:03 am

[…] Guy @ The Dividend Guy Blog writes To Buy or Not To Buy Are We Heading Towards a Market Correction? – Is now the time to buy or […]

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