My friend texted me and asked if he should invest more money into VTI since it had recently dropped drastically. He has set aside some sideline cash for just this purpose.
VTI is an ETF which tracks one of the broad US stock market indexes. He has been investing in this ETF for a while and has done some day-trading transactions on top of his regular contributions.
I’ve considered the opportunity of downturn investing for several years now. So these are my questions:
- Q1: Where do you have the extra money to invest into VTI?
- Q2: Will you be upset if the investment drops further?
- A1: He said that he had around $100k set aside for just this kind of opportunity. It’s been sitting in a savings account for the past 4 years.
- A2: He’s hoping that this would be a temporary “flash” drop. If it went down too far then he’d probably bail out of the investment.
1. Investing extra cash
It might make sense to invest extra cash if you can pull that cash from another investment which you don’t think will perform as well as this investment opportunity.
But that requires two independent decisions: a) that the other investment won’t do as well and b) that this investment will be a good one and recover from this current price drop in a timely fashion.
If it’s extra cash that’s been sitting around idly collecting dust, why invest it in something like an ETF? ETF’s just don’t dip or surge far enough to make them a good day-trading opportunity. This lack of volatility is what draws many investors to ETF’s.
What about all the dividends he gave up with his sideline cash? Buying at $135/unit versus the previous $150/unit, even if the fund goes past that initial $150 again, the return on investment is negligible.
It might make sense to keep sideline cash to invest in something where you might have a 25% or 50% return on investment. But these would be active investments requiring a lot of research and effort. Tough for most busy professionals to learn and coordinate.
2. Investment keeps dropping
The ETF went from $150 to $135 and this is the point that my friend thinks he should enter. But if it drops further to $110, will he be pissed that he didn’t wait longer?
If he invests his idle cash at $135 or $110 and the fund just holds steady at this lower level for the next 5 years, will he feel robbed? What action will he take?
Sure, chances are that this was a brief dip and that it might recover but I guess I wonder how he’d know. Him and I have talked about investing a lot and I never heard any such insight from him. I don’t doubt that such insight is out there among the successful day-traders; if I had the time and interest, I wish I had such knowledge.
I like having some sideline cash, not too much that I would miss out on steady returns, but enough that I can jump on an investment opportunity should one pop up.
This past week a friend asked me to invest in a private practice. At $250k it was a little rich for me but this is a successful multimillion dollar business already.
Another friend has asked me to invest in some land in Washington which he would be developing. Speculation? Absolutely. But I’m comfortable speculating with a small portion of my net worth. Probably somewhere in the $50k range.
Real estate deals and private business investing are such common opportunities for your sideline cash. But it would be negligent to ignore the loss of investment returns if that money was invested – opportunity cost.