Timing the market in a volatile environment not as easy as it looks
— -- Q: I'm one of the lucky ones who sold all my stocks in January before the big fall. When is a good time to get back in and what kinds of stocks are good buys?
A: You must be feeling very lucky right now.
Investors who sensed the economy and stock market weren't acting quite right may have taken a big chance and sold at the beginning of the year. Considering the Standard & Poor's 500 collapsed 48.8% this year to the bear market bottom so far on Nov. 20, you're probably feeling very good if you sold. In fact, if you were to buy back into stocks today, you're essentially able to buy your portfolio back in a 50% off firesale.
But will you? I've noticed it's usually the people who bailed out of stocks early who are also the ones most worried about getting back in. I'm not sure what it is, maybe the feeling of having dodged the bullet once already, but these investors tend to hem and haw and sit on their cash waiting for the all's clear sign to get back in.
Here is the problem. There will be no all's clear sign. There won't be a bell or light that goes off that tells you it's safe to get back in to the market. In fact, there will likely be a series of sudden and violent fake outs that may more than erode your good fortune in selling.
Let's use an example. Let's say you started the year with $1,000 in stocks and decided to take everything out. And let's say you told yourself you'd jump back in, but only once stocks rose 10% or more. A 10% rise would be your sign that the markets are healing.
Your first attempt to get back in would have come on Oct. 13, after the S&P 500 jumped 11.5%. But that rally ultimately failed, and resulted in a 15% decline, reducing your $1,000 to $850. You would have gotten a second chance, though, when the S&P rose 10.8% on Oct. 28. But, unfortunately, things didn't work out again as the market fell 20% to Nov. 20. That would knock your $850 to $680.
After we tally up losses from the two attempts to jump in, your $1,000 was whittled down to $680, or a 32% loss. Certainly, losing 32% is much better than losing 49% by holding on all year. But, you're still not invested and are exposed to the risk of suffering additional hits. Another couple of big haircuts like the previous two, and it won't be long before you see you would have been better off staying invested all along.
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