Our Time Horizon to be Fully Vested

In our July Portfolio Update we noted that our contributions for that month totaled $8,515, an amount which we planned to continue contributing for the next 2 years in order to reach a target portfolio size of $400,000. Actually seeing that number on paper made us think about just how much money we’re plowing into our portfolio while the market continues to hit all time highs on an almost daily basis now. While we are huge advocates of not trying to time the market by using dollar cost averaging, we’re starting to get a bit nervous due to the following reasons:

  • This 5-7 year bull market is due for a correction
  • The U.S. presidential elections will take place in 90 days now
  • The racial tensions in the U.S. are at a boiling point with large scale civil disorder being something that actually seems possible now
  • ISIS keeps bombing the isht out of everyone everywhere
  • Interest rates are due to be increased at some point
  • The U.S. deficit is massive now
  • There are growing tensions between Russia and Nato

The list goes on and you could argue that at any point in time you could come up with a similar list. Why is it so different this time that you ignore your strategy of dollar cost averaging and decide to engage in market timing?

That’s a very fair question. Here are the three options we see right now:

  1. Keep investing our ~$9,000 a month with a 2-year horizon
  2. Stop investing until a pre-defined date or until we see a market correction (defined as what exactly?)
  3. Increase the duration of our investment horizon such that our monthly investments become much smaller

As we concluded before, we don’t feel comfortable with Option 1 right now. If at the end of the year the market bottomed out and then traded sideways for 2 years, that would be the best scenario for Option 1.

As for Option 2, the toughest part is to decide when to start buying again. Let’s say we stop buying as long as the market trends upwards. If we’re wrong and the bull market continues on for 2 years with 100% gains, then the $200,000 we have in the market doubles and we’re happy. If the market trades sideways, we simply lose out on the 2.58% average yield that our portfolio generates. If the market tanks, we resume buying.

Option 3 on the other hand is the best of both worlds. If we extend our duration to 5 years’ time, then our monthly investment amount fall to $3,600 and we still engage in dollar cost averaging but at a slower rate. If at any time the market corrects such that our portfolio starts to be in the red by 20% or so across the majority of our stocks, we can then tighten that duration back up to 2 years again or even 1 year if the correction is severe enough.

What we’ll do now is adjust the monthly amounts for each of our stocks to reflect a 5-year time horizon. Since we have 30 stocks held across a number of different brokerage firms, this will take us a bit but we’ll look to have this all adjusted this month so that beginning in September we’ll be investing ~$3,600 a month as opposed to ~$9,000 a month.

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