In a popular subreddit, /r/investing, a user posted his scenario of having $100,000 in a 5% CD (certificate of deposit) account with no withdrawal penalties. The user is considering moving this money into the stock market, specifically into three major companies (Apple, Microsoft, Cummins), to hold for ten years in hopes of achieving a higher return. Commenters in the thread present a range of perspectives on this potential shift in investment strategy, mainly focusing on diversification, risk tolerance, and market timing.
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Several Key Opinions:
- Diversification Over Concentration:
Several commenters advise against concentrating investments in just three stocks. They suggest that investing broadly in index mutual funds or ETFs (exchange-traded funds) that track the S&P 500 or the entire U.S. stock market would reduce risk and likely yield a more stable return. This approach, favored by u/flat_top and u/prof_dorkmeister, aims to mitigate the risk of holding only a few companies by spreading investment across hundreds of stocks, thus capturing overall market growth.
- Split Strategy with Index Funds and Individual Stocks:
Redditors recommend a hybrid approach: placing the majority of funds (around $80,000) into index funds for stability and using a smaller amount (like $20,000) to buy individual stocks for potentially higher returns. Another redditor suggests using core ETFs like SPY or QQQ, which are well-diversified funds covering large segments of the U.S. market. Adding sector-specific ETFs, such as SOXX (a semiconductor ETF), allows for exposure to industries the investor finds promising, balancing diversification with targeted growth.
- Risk Tolerance and Market Timing:
Some commenters focus on the user’s risk tolerance and comfort with market volatility. A fourth redditor points out that the 5% CD provides a solid, low-risk return, implying that the user might want to stick with a less risky ETF rather than jumping into individual stocks. Meanwhile the comment following recommends a strategy based on market timing, specifically buying more of the S&P 500 fund (VOO) during market downturns or times of “fear” to capitalize on better entry points. This commenter cites past experiences where they bought during significant market dips, achieving notable returns.
- Patience with CD and Waiting for Market Correction:
Some commenters suggest staying with the 5% CD until the market undergoes a correction. One user proposes waiting for the market to drop by a significant percentage (e.g., 10%, 20%, or 30%) before moving money into a low-cost index fund, indicating a strategy for minimizing purchase prices. Another shared a similar outlook, noting the likelihood of a future market crash within the next decade, a common event in long-term investing, and stresses the importance of having the patience and fortitude to hold through downturns.
- Low-Risk Investors
- Balanced Asset Allocation Based on Term Needs:
One redditor emphasizes matching investments to time horizons and needs, suggesting that different asset classes (CDs, high-yield savings, equities) are suited to different purposes. They propose a diversified allocation across various terms, with CDs or money market funds for short-term needs, treasuries or other bonds for medium-term goals, and stocks for longer-term investments like the user’s ten-year horizon.
- Caution on Financial Advice and Personal Research:
Some commenters remind the original poster of the inherent bias in online advice and the importance of doing personal research. One noted that although they moved money from stocks to CDs for safer returns, they still invest in the S&P 500 as well. This highlights the need to consider both safe and speculative investments based on individual goals and risk tolerance.
Overall, the thread illustrates different philosophies on stock market investment versus CDs, focusing on diversification, risk tolerance, and timing, with most advising a cautious, balanced approach rather than putting the entire sum into a few stocks.