Sunday Musings: Should You Deploy New Money Now?

One of the most frequently asked questions recently has been whether it’s too late to deploy new money now given the run-up we’ve had over the past 6 months.

Here’s what reader SS had to say:

Your Domestic TTI now is +9.36 and Int’l TTI now is +11.96. You’ve talked a lot about the exit and entering strategies.

However, since both the domestic and international TTI is extended too high, is it still good to commit the fresh cash into the both of the markets at this juncture or is it too late?

Reader Don had similar concerns:

Is this a good time to put new money in the market as long as I use a stop loss or is the market too risky at this level to put in money now?

Thanks for your guidance.

Of course, if I had the exact answer, I would be competing with Gates and Buffett for the top spot on Forbe’s list of richest men.

Since I don’t, and no one can predict whether next week will be the start of a market downturn or not, I have to use a different approach.

New money flows into my advisory business almost on a weekly basis. To determine whether it should be deployed or not, I review with a client his risk tolerance along with the possibility of using my incremental buying procedure and sell stop strategy.

For example, let’s assume that a client is just about fully invested but has another $100k he is considering deploying in the market for long-term growth.

My main question to him would be if, after the investment has been made, the market drops and we get stopped out with a 7% loss, will that be acceptable?

If he’s aggressive, he’ll say “yes,” and we proceed accordingly.

If he’s conservative, he’ll say “no,” and I suggest using the incremental buying procedure. In that case, I would initially deploy only 1/3 of his $100k, or $33k. If the market corrects thereafter, and he gets stopped out with a 7% loss, that only represents a 2.3% loss of his total intended investment of $100k.

If that’s acceptable to him, we’ll proceed accordingly.

If it’s not, he should not invest any other funds in the market at this time.

This is a simple, quick and easy process you can use to identify what type of investor you are and whether adding more money to the market goes along with your emotional make up.

Better yet, if you at all have a pit in your stomach trying to make that decision, simply don’t and stay on the sidelines. Your comfort level is what matters most, which is contrary to what many commissioned brokers want you to do.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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