Fear is a powerful motivator when it comes to money. If you panicked and cashed out stocks during any of the past few wild market swings, that decision could curdle into regret if equities rebound and the long bull market continues its climb higher.
If it’s any comfort, you won’t be alone. Fears of a wider market crash were high when major market indexes fell 10% in early February as investors fled stocks. That was reflected by a slump of 23% for TD Ameritrade’s Investor Movement Index, a gauge of investors’ outlook based on their holdings and trade activity. That marked the biggest one-month drop since the index was created in 2010.
Still, the current bull market has stumbled through five corrections (defined as a drop of 10% or more), then regained its footing, for nine years and counting. With each correction comes panicked sellers who think the market’s about to tank.
Wayne Maslyk, a certified financial planner and CEO of Great Lakes Benefits and Wealth Management in Sandusky, Ohio, unsuccessfully tried to talk one client out of selling his stocks and moving to cash during the February correction. “He shouldn’t have, but it’s his money,” Maslyk says. “Ultimately he’s the boss.”
If you’ve panicked and moved to cash too soon, here’s how to get back into the stock market.
Don’t do this: Try to time the market (again)
If you sold stocks or funds but now have second thoughts, you may be tempted to sit on that cash until prices bottom out. But you’ve already tried to time the market by cashing out when you thought the market hit its high, so resist trying to similarly predict when the market has bottomed.
That’s the plan of Maslyk’s client. “He’s a sharp guy, he just thinks he can time the market — which if he could, he wouldn’t have been in the market when it went down, right?” says Maslyk, who advised his client to move to safer assets such as bonds or fixed annuities rather than just parking himself in cash.
Market timing is the Holy Grail of investing, yet even professionals are bad at this.
Investors have an instinctive desire to chase hot stocks and sell poor performers, but that’s a whack-a-mole game that over time costs money, experts say. “Market timing” — buying when the market is low, selling when it’s high — is the Holy Grail of investing, yet even professionals are bad at this. Over a 15-year time horizon, less than 8% of fund managers outperform the market, according to 2017 research from S&P Dow Jones Indices.
Do this instead: Buy using dollar-cost averaging
Keeping cash out of the market during a downturn is a losing strategy. “That isn’t really how you should think about corrections and volatility — that’s just a fact of the market,” says Mario Hernandez, a principal at Gemmer Asset Management in Walnut Creek, California. “You’ve got to think more about your long-term goals and the best way to attain them” than the short-term fluctuations in the market.
Keeping cash out of the market during a downturn is a losing strategy.
“Probably the best way to go into the market rather than a lump sum is dollar-cost averaging, like putting 20% back in each month,” Hernandez says.
Dollar-cost averaging means spreading out stock or fund purchases at regular intervals in roughly the same amounts. It takes the emotion out of investing and helps you avoid mistiming market purchases by consistently buying whether stock or fund prices rise or fall.
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Don’t do this: Reinvent your investing style
Steadiness is the name of the game for long-term investing gains. That’s one reason the broad trend is toward passive investing, which advocates buying funds that track broad indexes because stock markets as a whole tend to rise over time.
When markets are in turmoil, stick to your investment plan, advisors say. “The key is knowing you are being consistent putting money in your 401(k) or investment accounts,” Hernandez says. “That way, you don’t worry about what the market is doing today, tomorrow or in two years because most of the time the market is going up.
When the market is down — whether a correction or a bear market — that’s a very finite period of time, and it’s not very long.
“When the market is down — whether a correction or a bear market — that’s a very finite period of time, and it’s not very long,” Hernandez adds. “It may seem long, but in actuality when you look at history those times are very infrequent and much shorter in duration.”
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Do this instead: Reconsider your portfolio mix
Market corrections provide a gut check on risk tolerance, and the panicked feeling to sell may be more an indicator to reduce your exposure to equities rather than cashing out and fleeing the market altogether. Try to find the right balance in your portfolio of stocks to capture market growth and safer investments such as bonds and money market funds, experts advise.
“You can stick it out when the market is going bad, so long as you are doing things right” with your portfolio mix, Maslyk says. “I have my clients carve out a piece of their investable assets that we keep in safe stuff — boring, 3, 4, 5% annual return investments. When it’s not all your money going down, it’s easier to hold out.”
You can stick it out when the market is going bad, so long as you are doing things right.
Coming back into the market, you may want a more aggressive portfolio with a heavier percentage in stocks — but that’s dependent on how close you are to retirement and how much income you’ll need in retirement. “It’s hard to catch up when you pull out at the wrong time,” Maslyk says.
“There are four general money values I ask clients to rank: growing cash, controlling taxes, keeping it liquid or keeping it safe,” Maslyk says. “If people put safety first, but all their portfolio is in stock, then those are the people getting freaked out when the market has these big pullbacks.”