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Investing in Pricey Markets

GOT A LARGE SUM to invest in the stock market? Pulling the trigger and making a big purchase can be frightening. After all, the S&P 500 suffered a 49% price drop during the 2000—02 bear market and plunged 57% in 2007—09. What if you made a big purchase—and the market suffered that sort of loss?

That prospect is enough to paralyze many investors. How can you unfreeze yourself? Start by deciding what percentage of your portfolio you want in stocks. How can you get from here to your target stock allocation? History tells us that you’ll clock the highest return by moving everything into stocks right away. This is no great surprise: Stocks rise over time, so buying sooner will, on average, give you a better result.

Problem is, you won’t get an average result. Instead, you get just one shot at moving all that cash into stocks, and buying all at once risks buying just before a major crash. The older you are and the bigger the sum involved, the more cautious you’ll want to be.

One possible strategy: Take the money you want to move into stocks and divide it into 24 or 36 chunks. Move one chunk into stocks every month, with the goal of being fully invested within two or three years. If share prices drop 15% from current levels, double your monthly purchases. If the market falls 25%, triple your purchases.

While buying stocks slowly reduces risk, selling slowly increases it. Yet many folks do just that: If they discover they have too much in stocks, they will often slowly ease out of the market. This is all about aversion to regret: They hate the idea that they’ll sell a big chunk of stock—and the market promptly rockets higher. But remember, during the period you’re easing out of stocks, there’s a danger the market will go against you—and your aversion to regret could come back to haunt you.

Next: Moving in Together

Previous: Coping With Market Declines

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