As the bull market rages on, hot stock tips can be found on every corner and new IPO’s are coming out on a daily basis. Millions of dollars are flowing into the stock market daily. Let the good times roll.
You may call me a permabear or a pessimist, but I’m very concerned about buying stocks in this current market environment. The only stock that I’m not concerned at all about buying at all time highs is a total stock market index fund. I’ll buy it all day everyday no matter what the price. There are multiple reasons why.
The first one is that It will always go up over time with no concern for bankruptcy or default. JL Collins and Tony Robins have spelled this out in there books The Simple Path To Wealth, Money Master the Game and Unshakeable. A total stock market index fund is composed of thousands of company stock that represent the US economy. It will have dips along the way of its relentless march up and this is to be expected.
The second reason that I’m not concerned about buying a total stock market index fund at all time highs is because of the ability to tax loss harvest. If we undergo a market crash of epic proportion and I end up with a huge paper loss I can always tax loss harvest and buy another total stock market index fund . That’s right I can lock in those losses and deduct $3K a year from my earned income over several years, but if I have capital gains from the sale of appreciated shares of stocks before the crash, I can also use the losses to get rid of all my capital gain taxes. This can be done because we have so many low cost index funds on the market that all rise and fall at the about the same rate. I can sell VTI and buy an S&P 500 fund like VOO. There are not the same, but close enough so that their returns are almost identical. So essentially it’s like selling VTI and buying back another VTI like index fund at the same price point. In fact there are so many options when it comes to total stock market index funds and funds that tracks a passive index that you could actually tax loss harvest twice if you needed to. Say for example you buy VTI and it drops 30% and you decide to tax loss harvest that 30% loss and sell VTI at a loss and buy VOO. Lets say 25 days later VOO falls 15% and you decide to tax loss harvest again. You could then buy Ishares ITOT fund, Schwab’s total stock market index fund or the Vanguard Russell 3000 ETF. Of course you would probably just wait 31 days and buy back VTI so that you would avoid a wash sale, but the options are endless.
The third reason that I’m not afraid to buy a total stock market index fund at all time highs is because It has a very low expense ratio. In so doing, it’s cheaper to keep her and that leads to more profits for compounding vs. an actively managed ETF with higher fees. Thousands of mutual funds are being transitioned into active ETF as the bloomberg article explains and more are coming. These active ETF’s promise great returns, but at the expense of lower compounding because of their higher fees in their attempt to beat the market. Don’t get distracted by theses actively managed funds. Over time only a handfull will beat the market and none will do so consistently. Don’t try to find the needle in the hay stack. Just buy the whole stack as Jack Bogle famously stated.
The fourth reason is that over time stocks have been proven to beat inflation. Inflation has started to rear her head once again and There is no better inflation hedge than stocks. That’s right not gold, bitcoin or real-estate; stocks.
The final reason why I will continue to buy index funds is because it’s the safest way to slowly grow your money without risk of loss. I’m not talking about paper losses that occur in bear markets that can last 5-10 years. I’m talking about permanent loss. There is no risk of permanent loss if you can hold throughout the down market years. It’s the safest way to grow your wealth. It will on average double every 10 years and you can sleep like baby as long as you can leave that money untouched by making sure you have no need for it.