Worried about a frothy market? Here's how to start building a long-term stake anyways

Published Sun, Jun 23 202410:00 AM EDT

Here's our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can't offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week's question: Hi Jim and Jeff, my daughter is 26 years old and I invest her money for her. She is currently in individual stocks (mostly recommendations from you and CNBC), with most invested before joining the Club. I realize since joining the Club I need to buy the S & P 500 to provide proper diversification. The market has had a pretty great run, so I hesitate to buy now. Do I need to wait for a pullback, and what level would that be in the S & P 500? Also: Should I buy in increments, and do you recommend other index funds? Thanks for all your advice. The Club is the best thing I have done in advising my investment decisions! Kelly (Toronto) Several factors need to be considered to chart an appropriate course of action to get money to work. Looking at your question our two main takeaways are You're looking to increase diversification by putting this new allocation to work in a low-cost exchange-traded fund that tracks the S & P 500. That is also a more passive approach for this allocation, as opposed to the more active part of the portfolio already invested in single stocks. You're looking at a time horizon measured in years, maybe even decades — certainly not days, weeks or months. In this kind of situation, the old investment adage by Ken Fisher is applicable: "Time in the market beats timing the market." With an extended time horizon, the goal is to get money to work sooner rather than later, instead of worrying about identifying the perfect entry point; nobody times it perfectly 100% of the time. After all, waiting for a 5% pullback doesn't help much if the market advances 10% before that comes. Of course, it is understandable to fear buying a peak in the market. It's also a nightmare to buy right into a big downturn. This is where the "how" you buy comes into play. Both concerns can be mitigated by scaling into the position. Invest a fraction of the money now with the plan to add an equal amount at a predetermined time in the future. That way, if there is a sell-off, you're in a position to happily buy more at lower prices. One approach is called dollar cost averaging. For example, you could make four equal buys over the course of a month with weekly purchases, or you could do so across two months with biweekly purchases. Realistically, you can pick any predetermined schedule you're comfortable with. The most important thing is to remove emotion and stick to the process. At the same time, if a material pullback arrives before all the money is invested, you might want to pull forward one or two of those buys. In this case, you might implement a little technical analysis and keep an eye on the moving averages (50-day and 200-day) for guidance. Those could represent support levels to do some buying. Either way, the idea is to average out your cost basis, both opportunistically and over a predetermined period of time, so that by the end of the process, your basis will be lower than when you started. Implementing a strategy like the one above should be a solid way of getting money to work while still putting yourself in a position to take advantage of any subsequent weakness that may occur. Last year, we highlighted a few different S & P 500 index funds . No matter which one you choose, once that position for diversification is built, it may make sense to add exposure to another ETF offering that has a little more risk — but more potential upside — because these investments are for a 26-year-old person. The longer your time horizon, the more you can accept the added volatility that risk brings. A straightforward option is the Invesco QQQ Trust , which tracks the Nasdaq 100. While it has more volatility than, say, Vanguard's S & P 500 ETF , it's also provided better returns over a multi-year period. Over the past decade, the QQQ has a total return of roughly 460% compared with approximately 230% for Vanguard's VOO. Building a position in another diversified ETF with more risk, such as the QQQ, can also be done through the dollar-cost-averaging approach. You might consider breaking each contribution into a split between those two ETFs based on your preference and desired risk/reward profile. One last thing to note: Keeping some cash on hand is always a good idea. Cash is often overlooked as a position, but it's what lets you take advantage of weakness. A diversified portfolio is great. However, when the market hits a rough patch and the selling is broad-based, we may still be looking at a portfolio in which most or all holdings are in the red. In these instances, it's always nice to have cash on hand to do some buying. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., May 15, 2024.

Brendan McDermid | Reuters