I have discussed this before, but it’s an important subject that every investor wrestles with at one time or another: Should or should I not invest new money at this point?
Reader Norm put it this way:
I have been following your newsletter for some time and you saved me a lot of money last year. Would you put new money into this current market? I don’t think the TTI has recently changed dramatically and with this Dubai situation, should I leave the “new money” on the sidelines?
Since there is no clear cut answer that applies to everyone, you have to look within and first determine your risk tolerance. For example, let’s assume you are fully invested but have another $100k that you are considering deploying in the market.
To me, there are 2 aspects to that decision:
1. Take a look at a worse case scenario and determine your risk tolerance. If you were to invest your additional $100k all at once, and the markets immediately dropped thereafter stopping you out with a 7% loss (assuming you use a trailing stop loss discipline), do you find that acceptable and can you live with this result?
If you are not that aggressive, consider investing only 50% of your assets, in which case your risk has been reduced to 3.5%. Still too much? How about an initial investment of only 33%, which may result in only a loss of 2.5% when measured as a percentage of your available new money?
You only can determine where you fit in. If none of these prospects are appealing, simply don’t invest.
2. You could make the argument that for quite some time now the market has been overextended, yet it continues to higher levels after only pausing briefly. If you do invest additional monies at this time, be sure to use funds/ETFs that are less volatile.
You can select those by dropping down the M-Index rankings in my StatSheet or simply using funds with a lower beta than the overall market as represented by the S&P; 500. I talked about appropriate fund selections in more detail in Using The Benefit of Hindsight.
Ultimately, no one can tell you whether to invest new money at this time or not. It comes down to your personal decision, but if you follow my suggested process, you may find it easier to come up with the answer.