However, I believe you also need to take into account human nature and the fragile state of investor psyches. That's why to many investors I recommend buying back into stocks in a series of several steps.
Think you're ready to invest in stocks again but remain nervous? Then take whatever amount you've decided should to be allocated to stocks (and bonds) and break down the purchases into three, four or even five steps.
I'm not talking market timing here. Rather, I'm talking confidence building.
Auto-Pilot Investing: I remain convinced there's one group of investors that will emerge in terrific shape from the recent market turmoil. They are those who turned on the auto pilot in their retirement savings vehicle of choice and kept it on that course all through the financial crisis.
They didn't stop contributing to a 401(k) or direct everything to a money market fund; rather they bought stocks in small bites at cheap prices that in 10, 20 or 30 years will provide them with marvelous gains.
If you're not in this category, then join it by bumping up your weekly contribution or redirecting it to a broadly diversified, low-cost stock fund.
Even if the $100 you contributed to this week falls to $75 next week, your $100 contribution next week will buy you one-third more shares in a given investment.
Following these three steps can't guarantee it's safe to invest in stocks now, but they will reduce your risk and improve your chances for success.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at email@example.com.