Thinking about getting back into the market? Follow these steps.
I’m sure it’ll come as no surprise to hear that the downturn and volatility in the market prompted some investors to get out. After all, The Dow Jones Industrial Average, one of the most common market benchmarks, fell 33% in 2008 and followed that up by reaching a 12 year low in early March.
However, since then it has rebounded by almost 30% through July 6th. In addition, the CBOE Volatility Index, the most common benchmark of volatility, has fallen 64% from its high in November 2008. This decline is an indicator that much of the fear that has plagued the market seems to be subsiding. So I think it’s natural that many of those who got out are starting to wonder, “Is now the time to get back in”?
Before deciding whether it’s the right time to get back in, I would first suggest that you to take the time to create a long-term investment strategy. It should be one that you feel comfortable following through both good and bad times. The core of your new strategy will include an asset allocation that is appropriate for your situation.
The general rule of thumb is to have a weighting of stocks equal to 110 minus your age. However, we would recommend not only looking at your age but also take your risk tolerance and investment goals into account. Each can alter your asset allocation from the general rule of thumb slightly or significantly.
Once you have decided on an investment strategy you’ll need to determine how much of your money you want to put back into the market. Are you comfortable enough to put all of your money back into the market? Or do you only want to initially invest a portion of your money?
There a few different schedules you can follow when you decide to get back into the market depending on your comfort level. For instance, you can put all of your money in at once. The benefit of this strategy is that you money is fully invested and you are able to capitalize on any appreciation in the market. The risk to this strategy is that the market could fall from its current levels.
Or you could ease back into the market by making several transfers. This strategy will allow you to take advantage of dollar cost averaging and will help ensure that you are not buying at the highest price for that week or month of the purchase. However, only a portion of your money will be invested to take advantage of any appreciation in the market.
Two common approaches to easing back into the market are four equal transfers or one larger transfer followed by two equal transfers:
- The first involves transferring 25% of your account into the market on a dedicated investment schedule. Under this strategy you would pick either a weekly or monthly transfer schedule and pick a dedicated day to complete the transfer.
- The second approach to easing back into the market usually involves putting 50% of your money back into the market now and phasing the remaining money over the next few weeks or months. If you choose this approach, you will want to pick a dedicated schedule similar to the approach above.
With so many strategies or options for getting back into the market, which one do you choose? We typically recommend the last strategy because this strategy allows you to participate in any stock market appreciation but still gives you downside protection. It also allows you to dollar cost average in the remaining portion of your money.
If you have questions about getting back into the market, need help with your asset allocation of if you want to discuss your investment strategy, please feel free to contact us by phone at 877.627.8401 or by email at info@smart401k.com.
Buck Wendel, Investment Advisor
