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Hypothetically, say you lost your nerve and pulled you money out of the market because you thought it was obvious the entire economy was ready to collapse due to incredibly high valuations for both stocks and real estate and finally implementing tariffs, only to witness the market quickly recover. How would you get back in?
I suppose this person (not me, of course, since I am a long term index investor) would be best served using a dollar cost average, but over how many months to get back in? I’m thinking 9 months… maybe?
Would you agree that at this point Lump summing it back in at this point is folly?
I was in this industry for a long time, and I saw clients get out when the market was down, and get back in when they felt comfortable, which usually meant after the market had rallied for a while. So, they got out low, and in high. The market cannot be timed. Set a comfortable asset allocation and ride it out
If you were imprudent or impatient, or both, you may need to take your medicine. If you know you need to get back in, I’d suggest giving yourself a short timetable to do so, say three months, and not being greedy about when you reenter. The market usually has some dips and jumps in that kind of period, and you can look at performance of your target fund or ETF, or whatever else it is you want to get back into. Look for a dip that seems slightly larger than the normal ebb and flow, and then get back in. You will have taken your medicine, but not more than you really had to.
If you got out of the market because of incredibly high valuations on both stocks and real estate why would you get back in now? The valuations haven’t changed. Stand by your convictions and be happy with your 4.25%.
If your friend lump sums right now, they will be about break even, depending on when they got out.
I had thought about getting out because it did seem obvious to me that the market was going down due to uncertainty, and in this case I would have timed it about right.
My son asked if I had gotten out the other day so we did the calculation to see how it works have worked out (I stayed in), and it would have saved me 7%, since I wouldn’t have timed it perfectly, but as long as you get back in before the market returns to the number that you got out at, you win.
I think the “never get out folks” don’t realize that you don’t have to time the market perfectly. But I would agree in general that you don’t usually know what the market is going to do (and I don’t know what is going to happen in the coming months if the tariffs “unpause”, etc.
Some people take a portion of their portfolio to play with. Call it a “sand box”. They use that container to buy and sell (trade) and it satisfies their itch to beat the market without risking it all. Most of their investments are outside that box. Those investments are allowed to grow over time and are added to using a long term “buy and hold” strategy.