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]:
#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 [2] 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…
What’s worse to you: leaving $400 on the table or losing $400 when taking a chance of making money?
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