I hate buying high...convince me otherwise

[JordanIB]

I'm in a fairly common situation...

2 years out of school. Making a good salarly, contributing to get the max match out of my 401k. Saving a lot in addition to that, but have way too much in savings just sitting in an HSBC account at 5.05%.

I have been delaying (no valid reason..just lazy) opening up an IRA, but now just want to go ahead and do it. I'd do the max for this year. And then max out again next year.

The only thing is, I'd be putting most -- if not all -- of the $ in index funds, and I hate getting in now when all the indices are 5 or 6 year highs.

Please tell my how poor my thinking, convince me why I should open up the account right now, and what should I be starting out with as investments?

[DesertCat]

The best example of why it's sometimes okay to buy high is a (possibly true) story I heard. It happened when Buffett took over Berkshire Hathaway, it was trading around $15. Later it hit $100. One of his acquaintances decided to wait till it went back down before buying any. It never did, and he never bought. It's trading at $107,000 today, of course it's almost 40 years later.

In your case, I'm assuming you want to maximize your returns over the long run, since it's an IRA. Don't worry too much about the indexes setting records, for two reasons. First is the record setting indexes are just catching up to where they were 6 years ago (meaning you are buying something that's increased in value for 6 years, for the same price), and the Nasdaq is still less than half it's high.

Second is that you are investing for the long run, and you are only putting in a limited amount this year. Your IRA will be "dollar cost averaging" for the next 30 years. Google it. If the market collapses next year, your average price after your second year will be much closer to the market's low, than the high, because you get many more shares when the market is low. Just max out each year and don't worry.

[gull]

Historically, the stock market has gone up. There are tons of times where stocks have been very high.

http://www.indexfunds4.com/

When I first started investing, I felt the same way. Stocks were relatively high and I felt very bearish. Nevertheless, I invested the money and to my surprise the market went up for the next year.

Here's the way I like to think about it: I would rather invest money and have the market go down than not invest money and have the market go up. If I lose money when the market declines, at least prices will be lower when I continue investing. If you're a net saver (you are), it's actually a good thing for prices to go down. Pretend you only have 5% of your lifetime investment invested now. That's probably optimistic. If that 5% of your total lifetime investment goes down by 25%, it's actually +EV because you get to buy 95% of your investments at a 25% discount (from the initial price). Warren Buffet once said that he thinks of stocks like toothpaste; when prices go down, the store is having a sale. Analogously, you may have bought 1 tube. If the store has a sale, sure it sucks that you didn't wait until the sale to buy the tube, but now you can buy the rest of your lifetime's supply of toothpaste on sale.

It's much worse, in my opinion, to stay out of the market and see it go up because there will never be a way to recoup those missed gains.

[JordanIB]

Ah, yes. I forgot about the benefits of dollar cost averaging.

Ok. I'm convinced. I just needed encouragement. Will get something done this weekend [img]/images/graemlins/smile.gif[/img]

[SlowHabit]

One guy once said, "The Dow has record high every week."

[ItalianFX]

[ QUOTE ]
One guy once said, "The Dow has record high every week."

[/ QUOTE ]

Yeah now that the Dow is at new highs, CNBC always reports, "the Dow Jones closed at new highs."

No duh, Richard!

[JordanIB]

So now that that's settled...

T. Rowe, Fidelity, Vanguard, other? Where should I open one? Does it really matter a whole lot? I'll be investing in funds, obviously.

[DesertCat]

Vanguard is a good choice, their funds are low cost and Vanguard is a solid company.