I got a call from my former assistant a few weeks ago—she’s off working at an accounting firm, after successfully completing a year of service at The Daily Dirtnap. She’s saving real money for the first time, in her 401(k), and wanted to know what to invest in.

Ugggggggggggghhhhhhhhhhh

It’s the hardest question in the world to answer. Impossible. As Commodus said in Gladiator: “It vexes me. I’m terribly vexed.”  Now is actually the worst time to begin your investing career, because stocks and bonds are overvalued, and most people are constrained to investing in stocks and bonds. For sure, there are pockets of value here and there—and that’s what I try to focus on in my letters—but certainly nothing that’s going to be an option in a 401(k) plan.

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In fact, her 401(k) defaulted her to a 2060 target retirement date fund, which isn’t unreasonable, but a 2060 retirement date fund is going to be a lot of stocks, and in particular, a lot of growth stocks. To make matters worse, if there is a stable value option, it isn’t going to yield diddly.

Here is the sad reality: your starting point matters. Say you’ve cobbled together $10,000 to invest. If you invested it all in the summer of 2007, you are very unhappy. If you were lucky enough to have a starting point of March 2009, you are extremely happy. Actually, we can quantify it.

We ran some numbers here internally, and if by pure chance you began your investing career in the summer of 2007, and put it all in the S&P 500, you’ve annualized at about 6%. If by pure chance you began your investing career at the lows in 2009, you have annualized…16.5%. That is a massive difference, entirely due to luck.

So what is the answer?  What do you tell someone who is chomping at the bit, ready to deploy that cash?  Wait for two years?  What if the market is higher in two years?

It is really, really hard.

Dollar Cost Averaging

You can’t tell people to wait, because the future is unknowable. What you can tell them is to not plop it in the market all at once.

In the old days, like the 90s, the wisdom was that you should dollar-cost average into your investments. You should send a $300 check every month, whether the market was up or down. Timing the market is something that should only be attempted by a handful of people, so instead of timing it, make continuous contributions. In practice, it can be hard to do, because people get excited by higher prices and contribute more, and demoralized by lower prices and contribute less.

The same applies here. If a novice investor had a $10,000 nest egg to start with, my advice would be to piece it out $1,000 at a time for ten months, which would reduce the risk of dumping it all in at the highs.

There is a lot to be learned here. Even if you are a tactical investor like myself, there is a lot of risk around entry and exit points. As I’ve gotten older, I’ve learned to average into trades and average out of them. After all, it’s not like I’m sitting on a trading floor anymore. I have no particular edge in finding the precise point to enter a trade.

What About Valuations?

But what about the idea that equity valuations are objectively high?  Buying expensive stocks isn’t always a bad idea, but it’s a lower expected value trade.

Well, one way around this is to focus on stocks that are cheap. Lucky for us, there is a factor for this: value stocks. In 2017, growth stocks massively outperformed value stocks, so investing in value would be a kind of hedge against a market downturn. Of course, even value stocks are overvalued by historical standards, but it’s a good option in the spirit of doing less harm.

You can also find sectors that are overvalued, but you’re taking on a lot more idiosyncratic risk.

You can also diversify into other asset classes. Like bonds, but be specific about which types of bonds. One thing that people like myself are paying close attention to is the fact that commodities (hard assets) are more undervalued relative to financial assets than at any point in recent history. Commodity investing is fraught with all kinds of complex risks, but investing in companies that produce commodities is relatively straightforward.

The trouble with beginning your investing career when everything is expensive is that you are a novice, and you’re not yet sophisticated enough or creative enough to figure out workarounds. So most people are just going to have to take it on the chin.

The good news is that if you were the unluckiest person in the world, and you put it all in play at the top in ’07, you still made 6% over the last 10 years, which is better than a kick in the pants!

Speaking of a kick in the pants, check out this month’s episode of The Monthly Dirtcast where we talk to Vancouver real estate agent, blogger, and noted bear Steve Saretsky, who has some stories that will melt your brain.

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