Once you sell out, when do you get back in?
I recently heard about a 62-year-old who was scared out of the market following the dot.com crash in 2000. For the last 17 years his money has been in cash and CDs, earning a fraction of one percent. Now, with the market reaching record highs, he wants to know if this is the right time to get back in. Should he invest now or is it too late?
Here is what one advisor told him:
My first piece of advice to you is to fundamentally think about investing differently. Right now, it appears to me that you think of investing in terms of what you experience over a short period of time, say a few years. But investing is not about what returns we can generate in one, three, or even 10 years. It’s about what results we generate over 20+ years. What happens to your money within that 20-year period is sometimes exalting and sometimes downright scary. But frankly, that’s what investing is.
Real investing is about the long term, anything else is speculating. If we constantly try to buy when the market is going up and going to cash when it goes down we playing a loser’s game. It’s the classic mistake that people make. It’s the reason that the average investor in a mutual fund does not get the same return as the fund does. It leads to buying high and selling low. No one can time the market consistently. The only way to win is to stay the course.
But staying the course is psychologically difficult. Emotions take over when we see our investments decline in value. To avoid having our emotions control our actions we need a well-thought-out plan. Knowing from the start that we can’t predict the short-term future, we need to know how much risk we are willing to take and stick to it. Amateur investors generally lack the tools to do this properly. This is where the real value is in working with a professional investment manager.
The most successful investors, in my view, are the ones who determine to establish a long-term plan and stick to it, through good times and bad. That means enduring down cycles like the dot com bust and the 2008 financial crisis, where you can sometimes see your portfolio decline. But, it also means being invested during the recoveries, which have occurred in every instance! It means participating in the over 250%+ gains the S&P 500 has experience since the end of the financial crisis in March 2009.
The answer to the question raised by the person who has been in cash since 2000 is to meet with a Registered Investment Advisor (RIA). This is a fiduciary who is obligated to will evaluate his situation, his needs, his goals and his risk tolerance. And RIA is someone who can prepare a financial plan that the client can agree to; one that he can follow into retirement and beyond. By taking this step the investor will remove his emotions, fears and gut instincts from interfering with his financial future.