Many people got scared during the bear market in 2008 and early 2009 and sold their mutual funds or stocks. Since hitting a low in March 2009, the S&P 500 Index has almost doubled. A lot of people have missed out on this stunning rebound. They're still trying to figure out the "best time" to get back in.
The problem is, timing the market doesn't work. When you decide to sell an investment, you're really deciding to make two decisions: when to sell a stock or fund, and when to get back in. You think: "I'm going to wait for the right time to get back in." But there is no right time. When prices fall, you'll think now is not the right time because prices are going down. When the market goes up, you won't want to pay more for a fund that you sold at a lower price. The anchorman on the nightly news won't announce the official end of the bear market.
You'll end up doing nothing and staying on the sidelines. This is how many investors miss out on market gains, which in the long run could jeopardize their investment plan and ability to meet their goals.
I recommend a strategy that takes the guesswork out of when to get back in the market. Start today by investing 50 percent of your money according to your desired asset allocation by dividing it among many different asset classes. Then put 20 percent of the remaining balance into your chosen investments on the same day each month for the next five months.
This way, you'll feel good if the market goes up because you're participating in it more each month and the value of your investments will rise. And if the market goes down, you'll feel good that you still have money to contribute and buy shares at lower prices.
This strategy allows you to gradually restore your mix of investments, rather than jumping back into the market all at once. It's not like bumper cars where you have to step on the gas all the way or slam the brake down to the floor. Hopefully, your fears about losing money in the markets in the past will be replaced by confidence about investing for your future. Plus, now that you've established the dates that you'll invest your money, you won't have to worry about picking the right time to get back in.
Actually, a good time to buy is when the markets look lousy. On March 9, 2009, the S&P 500 index hit a low of 676. That was a great day to buy stocks because negativity ruled the markets. Of course, no one can predict exactly when prices will hit lows or highs. But you always want to buy when prices are low and sell when prices are high.
Another thing is that the market seemingly never accommodates you on the day you invest. When you buy fund shares, be prepared for the market to go down that day. The market will frustrate you, but that's just an immediate emotional reaction.
Dust off your worries about losing money in the markets and try to focus on how the value of your investments will rise for many years to come. If you've chosen the right investments to match your tolerance for volatility and risk, you should be able to stay calm and avoid bad decisions, like selling a stock or fund when it falls for a few days. You want to be concerned about what your money will be worth five years or more from now, not what you'll earn in a day or week.
If you find yourself stuck on the sidelines, still bruised from the bear market, it's time to get back in the game. Once you take the first step, you'll build confidence as you add to your investment mix.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.