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No doubt because markets rose and fell so violently in August, many are asking whether now is the time to get out of stocks. My answer has two parts:
- If you are within five years of needing any or all of the money you presently have in stocks, now would be a good time to withdraw those funds. As so many of my posts have explained, no one should have their money in stocks if they are within five years of needing it. By getting out now, you may miss some of the upside, but it is still better than doing so after the market has suffered a setback. Put the proceeds of your sale in intermediate bonds set to mature about the time you will need it. For guidance on which bonds, see this post.
- If you do not need the money for five or more years, stay in the market. Trying to accurately time market swings is delusionary. Practically speaking, no one has ever demonstrated a consistent ability to time market swings. Many claim to have this ability, and/or a system to sell to you, and, yes, some do get lucky. But think: “Why would anyone with such an ability or system include me, even for a hefty price?” That person would not need to sell anything, or even talk to anyone. All he or she would need do is apply the system for his or her own portfolio and get filthy rich. But no one seems to be doing that.
Because no one can reliably time stock market swings, getting in an out can be dangerous. Emotions and media chatter urge people to throw money into stocks when the market is on a roll — in other words, when prices are high — while fear, and chatter about fear, urge selling when the market has taken a major hit and prices are low. You would be buying high and selling low, precisely the reverse of the age-old advice on how to make money in the market: buy low, sell high. This happened to many people in 2008, when the stock market crashed. Fearing that it would just keep going down, they sold when (as many said) they “could no longer stand the losses.” Few got back in quickly enough to capture the upturn when it came in 2009, not the least because the crash had generated so much fear that most people, and the media too, wrote off any gains as a “false” signal.
It would be better to work with your anxiety and ride the stocks down and have your money in them for the inevitable upturn when it arrives. And because you have no business being in stocks if you will need the money soon, the wait should impose no hardship (beyond depressing reading when you open your statements). Understandably, any market setback, especially one like the crash of 2008, creates a lingering fear that prices cannot recover, but this flies in the face of long market experience. Stock prices have always recovered and gone to new highs, and have done so within the five-year horizon used here as a test of whether stocks are right for you. After the great crash of 2008, stock prices surpassed their old highs within three years. Usually the recovery happens even faster.
If you have trouble sitting on your nerves, there is an alternative; it’s called dollar cost averaging. In this approach, you do not buy in all at once but rather feed that portion of your assets, those funds that you won’t need for five years, into the stock market gradually, over time, say monthly or quarterly or even annually, and you do so regardless of what else is happening. If it turns out that you have made any of these incremental purchases near a market peak, you can comfort yourself for having bought in at high prices that you did so with only a small portion of your assets, and that many of your incremental purchases were made at more attractive price points.
Bitesize Investing 