After a couple weeks of difficult market returns, investor fears are creeping up. As investor fears increase, so do the number of questions I receive regarding the market. Most of the questions revolve around the concept of exiting the market, essentially market timing. Should I sell everything to cash? Why should I be in the market during these volatile times? Should I move all my investments to bonds?
Just a couple years ago we were staring at a portfolio-killing time bomb waiting to detonate. The downturn of 2008-2009 really hurt, but, as with all downturns, it has become a memory. We all remember and still relate to the pain, but what did we learn? For those out there who exited the market, did you reenter the market at the right time? For those that stayed true to their investment strategies, did it pay off?
For most folks getting out of the market during rocky times is not difficult, but returning to the market is extremely precarious. Getting out is not what hurts the investor; consequently, it is not getting back in at the right time that is damaging. During Oct 2008, the stock market had wild swings. If an investor moved all their equities to cash, they would have missed out on a huge one-day run on Oct 13, 2008. All three major indexes (S&P 500, Dow Jones Industrial Average, and the NASDAQ) were all up over 11% in one day. The investors sitting on the sidelines in cash were rethinking their strategy after Oct 13, 2008. Being out of the market can be extremely costly.
What do we do?
Staying in the market is the right thing to do but only if you have a plan. An investment strategy based on factors associated with your life and risk profile is imperative. Positioning a portfolio to handle prosperous times while protecting against inflation and deflation creates a portfolio that promotes sleep at night. Blindly investing is risky in any market environment. Another important element of an investment plan should include dollar cost averaging. Consistently buying shares will reduce the total cost basis and increase return, so, while the market is down, buy the shares at a reduced price. Continuing to buy while the market is down is like buying your favorite product on sale. It makes sense, but most of us don’t follow through. I heard a wise investor once say the only thing American consumers don’t like to buy on sale is the stock market. It’s true!
While the questions continue, we should revisit those dark hours during 2008 and early 2009 when we thought the sky was falling. We should learn from our past experiences. Those who stuck it out and where positioned properly weathered the storm just fine. The next time the question about exiting the market pops up in your head ask yourself how did during 2008-2009. If you weather the storm, then you have your answer. If you didn’t, you either pulled out of the market or you had a poor investment plan. If you are currently without an investment plan, I highly suggest speaking with a fee-only advisor. Here are two websites to find a fee-only advisor in your area: