A Reason to Stay Invested

If you've been riding the stock market rollercoaster (mostly down, unfortunately), you may have contemplated pulling all of your money out and waiting for things to cool off a bit. But that's exactly the wrong thing to do. Why? Because you'll likely miss the upswing in the market when it happens (and it will happen sooner or later if history is a valid predictor.) Thoughts from Smart Money:

All bear markets end eventually. The average length of a bear market has been 18 1/2 months, but more recent ones have been shorter. This one is already four and a half months old. The bear market associated with the recession of 1990-91, to which the current economy is often compared, lasted just three months.

Feeling any better? Even if you're not, remember that it's important to invest with your head, not based on emotion. The best thing about bear markets is that they offer buying opportunities, several of which I've already signaled in this column. Which brings me to my final point: Bull markets usually begin when things look their worst.

Well, it's looking pretty bad now. But whether the market turns now or in 12 months, I'm staying invested and maintaining my monthly index fund buys. If it keeps going down, I'll have purchased cheap shares that will earn a great return when the market rebounds. And if it takes off now, the funds I've invested so far during this downturn will pay off nicely. It's a "win" in either case.

The worst thing that I could do is sell everything and try to get in when I think the market is on an upswing. No one can predict when the market will correct itself, so by sitting on the sidelines I would be taking the biggest risk of all -- the (likely) chance that I would miss much of the gains associated with an eventual movement upward. No, I'm staying put. Selling now is just too great of a risk.

For more thoughts on investing, check out these posts:

• What Will Happen to the Stock Market in 2008

• Vanguard Gets Reaction to Market Right

• How to Invest During a Recession

Comments

[Tim]

I don't see the point in losing your precious capital. The last bear market and recession of 2000-2003 saw the market drop 50%. Are you willing to lose another 50%? I'm not. Protect your capital.

[J in FL]

Tim,

And then the market goes back up. That's how things usually go... up and down and up and down, ect.

[Tim]

J,
I moved most of my investments to Stable Value Funds at the end of December. I've only been invested on average between 30%-40% in equities this year. So I do have some exposure to the stock market and I hope the market does go back up. However, I won't be willing to completely move to a Bullish bias until I start to see better technical signs. We are currently in a downward trend and I would like the market to break out of some key resistance levels first.

If you have been fully invested, I would NOT recommend you sell your stocks at these levels, however. If you have been fully invested during this downturn, your choices are limited. I always try to keep 10%-20% cash so I can buy in a downturn ... and I try to sell when the market gets a little overheated. About the time when everybody feels safe in the market. That's usually the time to take a little off the table.

[J in FL]

Tim,

Nothing wrong with that strategy. It's mostly a matter of investment-style I guess. I would just try not to touch my investments too much... even in a downturn. Keeping 10-20% cash for a downturn definitely good idea.

[Zook]

Tim-

If you have an asset allocation and you have a good amount of time before you retire, nothing should change right now.

Pulling out and timing gets people all messed up.

Take a 30-year old with a 85-15 asset allocation. If this person is comfortable and sleeps at night, placing the bug in his head to drop to a 40-60 or 50-50 on a whim messes with his portfolio in a big way.

[Zook]

Just a final thought. Maybe that 30-year old realizes that 85-15 is too much risk and he can't sleep at night and changes to 75-25. That is a good thing, but there is no better time to load up on equities for the long run than now.

The bad times WILL PASS.

[Tim]

Zook,
I agree with you for the most part and for 90% of people timing the market is a losing proposition. That's because they trade on emotion and not on technicals. However, it can be done. I've beaten the S&P 500 6 out of the past 7 years beating by an average of 7.1% per year. My track record when I was a "buy and hold" investor was not nearly as good and I rarely beat the S&P 500.

The primary reason why people get burned "timing" the market is they get too emotional. They sell when CNBC talks of doom and gloom and put their money in the market. You need to do the opposite.

I agree, easier said than done ... but it can be done.

[Zook]

Tim-

Fair enough.

Do you do this trading inside a taxable account to beat the S&P 500 taking into account trading costs and taxes? Or inside a tax advantaged account?

[Tim]

Zook,
I maintain 2 accounts. One with Vanguard where I purely use "Lazy Portfolios" with Index Funds and dollar cost averaging. This consists of my IRAs and Roth IRAs. This consists of about 30% of my retirement portfolio. The remaining 70% is in my 401(k) where I do my "timing" the market. I simply move money from a Stable Value Fund to Equity Funds based on market technicals. So to answer your question, I trade inside a tax advantaged account.

[Ryan S]

The reality though is that generally speaking, technical analysis does not work. Take any 1 or 2 or 3 technical indicators. Go back 20 years. Simulate trading based on these 3 indicators. 99.9% of the time, you will not beat the market, and the other 0.1% of the time, someone wants you to pay membership to thier system in order to "prove" that thier system works.

[zook]

well Ryan you are spot on.

[Bartender]

Get out while you can.

The US market will go down for the next months. The economy is so f*cked. You don't want to be f'ed by the market, so get out.

Check out websites like the one of Mr. Kunstler. Do your research. But get out while you can.

See you on the other side of the depression.

[FMF]

Bartender --

I think there's a reason why you're a bartender.