Once You’re Out of the Market, It’s Tricky Getting Back In - The New York Times

The standard wisdom says investors should hang tough and ride out market declines. But a big plunge always drives plenty of people to the sidelines.

That happened in March, when investors pulled a net $326 billion from mutual funds and exchange-traded funds, according to Morningstar. Much of that money is still on the sidelines. What’s more, plenty of people never got back into stocks after the last big bear market in 2008 and early 2009, missing out on a decade of gains.

“Jumping out of the market is a mistake, but staying out compounds the mistake,” said Greg McBride, chief financial analyst for Bankrate.com, which tracks bank savings and consumer loan rates.

To make matters worse, getting back into stocks can be a more difficult decision than leaving the market in the first place.

“We’ve spoken to many people where the amount of scar tissue they had from the financial crisis of 2008 and 2009 was still there a decade later,” said Meb Faber, one of the founders of Cambria Investment Management.

Ideally, he said, instead of abruptly abandoning stocks when they decline, shrewd investors will view market drops as an opportunity to buy — and have the financial wherewithal to withstand short-term losses. But many people act against their own interests, he said.

“Investing is the only business where, when things are on sale, people run out of the store,” Mr. Farber said.

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The sharp market recovery since stocks hit a bottom in late March was larger than usual but also is still in line with the kind of takeoff investors can miss by trying to time the market. From March 23 to June 30, the SPDR S&P 500 E.T.F. Trust, the biggest fund tracking the S& P 500, increased 38 percent. For the quarter, the fund was up 20 percent, and for the year, it was down about 4 percent.

Missing out on gains like that is painful, said Chris Cordaro, chief investment officer of RegentAtlantic Capital. Many investors regret hasty decisions to sell.

“You think it’s going to make you feel better, but once you get there, you realize that cash is the most difficult allocation when it’s not part of your long-term strategy,” Mr. Cordaro said. “In this crisis, I’ve had two clients go to cash, and both of them regretted doing it.”

The problem is that short-term money-market funds and bank accounts are paying almost nothing these days. With the Federal Reserve pushing interest rates back down to nearly zero — where they stalled for years during the financial crisis — being in cash as opposed to stocks can mean poor returns for savers who could buy stocks on the cheap during a down market.

“The Fed is pushing you into the stock market,” Mr. Cordaro said. “If it feels uncomfortable to be in cash, that’s by design. That’s what the Fed is trying to do.”

Yet holding stocks at a time like this is painful, too.

Ric Edelman, a talk radio host and a financial adviser, suggests that many people will be better off taking a very cautious approach.

He warns that the coronavirus pandemic could easily shake up markets for at least another two years. While long-term investors can afford to wait longer than that, many investors don’t have that luxury. Millions are in that category, including those nearing retirement and people who have might have lost their jobs, face bankruptcy or have been hit with a health crisis — or fear that one of these things will soon happen to them.

“I’m worried that many people are underestimating the severity of this pandemic and the potential to find themselves forced to sell at that very moment they shouldn’t — and end up undermining their financial security and wiping out a decade of profits,” Mr. Edelman said.

The Coronavirus Outbreak

• Frequently Asked Questions

  Updated July 7, 2020

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Investors who have already fled to cash should consider staying out of the market until the majority of Americans have been treated with any yet-to-be discovered vaccine, Mr. Edelman said.

“If you panicked and sold, do not second-guess that response,” Mr. Edelman said. “If you do go back into the market, then the next downturn will panic you again.”

During the pandemic, shifting to an asset allocation that emphasizes bonds may make sense. Instead of a classic portfolio of, say, 60 percent stocks and 40 percent bonds, cut your exposure to 40 percent stocks or even 20 percent, Mr. Edelman suggested.

“Maintain a long-term time horizon, if you can. Become Rip Van Winkle: Wake up in 10 years, and this will all be over,” Mr. Edelman said. “But you need to have a serious conversation with yourself and your spouse to evaluate the likelihood that you can act like Rip Van Winkle. Are you highly confident that you won’t need to touch that money for financial or emotional reasons?”

Investors who have lost their nerve might consider turning to a financial adviser they can trust — one who is a fiduciary and is obligated to put your interest first. While do-it-yourself investing is easy in a bull market, it becomes much more complicated in down markets, especially for people approaching retirement or those with other reasons to start making withdrawals.

When it comes to moving from cash back to stocks, investors have two basic options: Jump back in just as fast as you jumped out, or ease back in with a dollar-cost-averaging strategy — one in which you buy stocks consistently over time.

Because stocks tend to rise more often than they fall — and because no one can accurately predict those movements — it is likely that putting all of your money into the market at once will be the most profitable option, on average, for most investors. But your timing could be off. The market could fall sharply on the day you make your investment and not rise for years. There’s no single, sure answer.

“The mathematically correct option is to invest it all today,” said Mr. Faber of Cambria Investment Management. “Markets go up over time, and you want the most amount of time to benefit from compounding. But from a sense of emotional well-being, it’s completely rational to dollar-cost-average over whatever amount of time you feel is comfortable, whether that’s three months or three years.”

These are individual decisions, he said. “The whole key is to come to some approach that lets you survive this insanity.”

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