Thinking about "playing the market" to cover rent

[younginvestor2013]

As we all know, the market is very high right now. By no means am I trying to be a market expert, but I foresee some sort of correction by the end of the year. My investments, like many others, are doing very well.

As a little bit of background, I am 24 and have about a $300K net worth now, with no debt (largely due to inheritance but also aggressive saving and investing after college).

I live in one of the large metros of the country. I thought about buying when my lease is up at the end of this month, but couldn't seem to find the right place and also wasn't ready to take on the commitment yet.

So, long story short....I am renting again. My rent is currently very cheap for living in the city, but my place is so "college" and I'm ready to live in a little bit nicer of a place. So my rent will be increasing from about $850 to $1200, utilities included in both cases. While this is more than I would like, I am sick of living in a basement, in a small cramped bedroom, and am sick of having a very small bathroom and shower and just an overall old and poorly kept apartment. Therefore I am OK with this increase because I think having the amenities I will now have will be worth it to me, and I will still be able to save 18-20% of my gross income yearly.

Now on with my idea....

I still have some cash on the side lines from when I pulled the money out from my family's wealth managers....however, most has been invested since then in Vanguard index ETFs. Since then (it's been about ~2 months), my funds (obviously) have seen some nice appreciation, mainly in market fluctuation (some income but very immaterial).

I am thinking about selling off the amount of appreciation and putting it in my AmEx Savings account (85 bps interest rate). This would cover about 8-10 months rent for me at my new place.

And then since I wouldn't have my monthly housing coming out of my salary-based budget, I would either save more back into my Vanguard brokerage (hopefully when the market may be a bit lower?) or put a much higher percentage into my Roth 401K.

I know this is playing the market, which I am generally against and have never actually done.

Thoughts??

I'm only 24, and I wouldn't really "hurt" myself unless the market never goes down at all. I think I just would need to be aggressive about saving without having a monthly housing cost factored into my budget, and not let the extra cash flow go to waste.

 

[mickeyd]

I'm only 24, and I wouldn't really "hurt" myself unless the market never goes down at all. I think I just would need to be aggressive about saving without having a monthly housing cost factored into my budget, and not let the extra cash flow go to waste.

Why not just send me a bag of your ready cash and I promise to send you 12% annually or 1% monthly. Your call.

Or your could invest in a low-cost index mutual fund company like Vanguard. But that's boring.

 

[seabourne]

well, I think that I'm not entirely clear on what the tax implications of your proposed withdrawal are (pulling hte money into your amex account), but taxes owed could add to the cost of the decision. Take a look at what the costs you accrue would be if the market goes sideways - the cost may be higher than your confidence that you can predict the market movements. Recall that people were pointing out how overpriced the stock market was in 1997, but it wasn't until 2000 that the bottom fell out, and we're not near that level of valuation yet

If you're around downtown, I'm heading out of the office in about an hour, can grab a drink and discuss - working near the Lyric.

 

[younginvestor2013]

@mickey....not following you? My investments are with Vanguard.

I'm just looking for some unbiased advice here, and appreciate your positive input!

 

[heeyy_joe]

At the roulette wheel, I always bet on red.

 

[travelover]

I say go for it, report back in a year and let us know how it worked out.

 

[bjorn2bwild]

Ahh, the sweet bird of youth. Been there done that.
For the record, it did work, for awhile....

 

[timo2]

At the roulette wheel, I always bet on red.

I only bet on Number 22.

 

[timo2]

I know this is playing the market, which I am generally against and have never actually done.

Thoughts??

If you have a loss limit for the fun money, it probably would work out better than a trip to Las Vegas.

 

[Gumby]

I only bet on Number 22.

So long as Humphrey Bogart is whispering in your ear, you're good to go.

 

[younginvestor2013]

I don't appreciate the smart remarks. I work in finance and am formally educated in finance, so I'm not an illiterate. I am just looking to get some feedback, perhaps to reassure my idea.

But I guess posting this idea on a forum where relatively conservative investing/timing the market is frowned upon was a bad idea.

So nevermind....

 

[REWahoo]

A sense of humor is a terrible thing to see go to waste...

 

[younginvestor2013]

So is the opportunity cost of spending money versus investing at a young age.

 

[growing_older]

Why not?

You are young and although apparently trained and working in finance, it's different in theory and in practice when your own actual money is on the line. In any case, it seems like you are not talking about bailing to the sidelines or taking an extreme position, just taking a little off the table now and effectively dollar cost averaging back in. Not a big deal.

The worst possible outcome from this is that you are successful and start to think you can effectively time the market. Anything else is either a wash or a slight tuition payment to get some valuable hands-on experience. Sounds okay to me and I know plenty of people who did similar.

 

[utrecht]

What you're talking about doing is nothing but market timing. You will either be come out ahead or behind depending on whether or not we are at a short term high right now. Nobody has any way of knowing that, but markets at highs tend to go higher, longer than most people think they will.

You could've posted this last month and would already be way behind. You could try it next month and might time it just right. Personally I would leave just keep pouring money in and not worry about trying to time anything just right.

 

[photoguy]

I know this is playing the market, which I am generally against and have never actually done.

It's an immaterial amount so is not going to make a difference one way or the other. But what's probably more of concern is that it gets you into the habit and mind set of market timing which is generally a losing strategy.

 

[Finance Dave]

I see it as market timing and equate it to gambling. When you say you "see a correction coming", I think that comment is what triggered all the smart remarks...you're basically saying you have a crystal ball or can predict the future...which most of us don't believe in. My advice, it would not be a wise move.

 

[seabourne]

+1 - utrecht

only real change might be if taking money out now allows you the flexibility to put more money into your roth401k or something of the sort - the advantage lies more in tax arbitrage than market timing. If you're otherwise planning on just buying back in, rather than pay the transaction costs now build up some cash for optionality when the drop you're expecting happens.

If you're in finance your tax rates may change upward significantly in the next few years, and it might be worth your while to pull some money out so you can max your roth401k contributions while you're still in a lower tax bracket, but otherwise I think you're better off letting cash build than creating it by selling something.

 

[NanoSour]

Sounds a little like that money is burning a hole in your pocket and your itching to get some excitement out of it. Investing is not the place to get that excitement.

My suggestion, take $1500, go to Vegas and have yourself a good time. You'll get to see pretty girls having fun to boot.

Resist the temptation to engage in the market and you will be much better off.

 

[Gatordoc50]

If you are considering purchasing a home in the next 5 years, I would move some money to the sidelines anyway.

 

[travelover]

I don't appreciate the smart remarks. I work in finance and am formally educated in finance, so I'm not an illiterate........

Yea, but you are still just a kid. Intelligence combined with experience is called wisdom. Right now you just have intelligence.

Another useful part of wisdom is learning to laugh at yourself.

 

[MichaelB]

I'm just looking for some unbiased advice here, and appreciate your positive input!

In order for this to be successful you need to be able to replicate it. To replicate, you need to translate your feeling that the market will correct into an observable indicator. So, the key here is not the timing moment, it is turning it into something replicable. If you can share that, this might become a useful thread - for you and others.

 

[pb4uski]

As I'm sure you know, you are doing very well in terms of investments and your savings rate.

I'm less concerned with what you do now but more concerned with the precedent that it makes for you as you continue through life. If this "bet" pays off might it encourage you to do more market timing later on? And if so it is just a matter of time before you find yourself on the loss side of a market timing call.

As seabourne mentions, you also need to assess the tax implications of the move. I'm guessing that the gain would be taxed as ordinary income since it would be a short term capital gain.

If it were me, I would stay the course and not try to time the market. The difficulty with timing is not only when to go to cash, but also when to get back into stocks. Very few people can do the latter.

Unless your future plans to buy a house or whatever suggest you need more cash, I would stand pat. If you have excess cash, you could wait for the correction and then value average it into stock over a year or 18 months.

If there was no tax bite on the gains and you have access to tax-deferred/free savings through work and wanted to take some taxable account gains to help with the rent and increase your tax-deferred/free contributions by an equal amount then I would be less pessimistic about your idea.

 

[enjoyinglife102]

The responses have nothing to do with conservative investing or frowning upon market timing, they have everything to do with what the overwhelming data says about one's best chances of success. Good luck though, maybe you'll finally be the one who can successfully time the markets.

 

[RunningBum]

I think a lot of people read "playing the market" in the thread title and came up with their one-liners while barely skimming the post, especially after seeing the OP's age.

All it sounds like he's doing is skimming the profits after a run-up, and looking to get that money back in at a lower price later. Not jumping completely in and out based on market conditions. It's not much more than a rebalancing, really. So many people here advise to average into the market, but when someone wants to pull some out after a good run s/he is a dirty rotten market timer.

The advice that did make a lot of sense is to watch for and avoid short term capital gains, and also to keep money for a probably near term real estate purchase in a safer place.

I would closely track how you do with this strategy vs how you'd have done keeping it in the market. It's easy to overestimate your successes. For example, let's say you pull some out now, and the market rises another 10%, then drops 5%. At this point you jump back in, and the market goes up 5%. Some will pat themselves on the back for this 5% gain by "correctly" timing the market, when in reality you would've had a 10% gain by staying in.