You should get back into stocks if you'll stay in
— -- Q: After losing a fortune on stocks I moved my money into a savings account. Now, I'm losing ground again as interest rates fall and stocks recover. Should I dip back into stocks of big, stable companies?
A: It's this type of performance-chasing that makes investment writers and professionals cringe.
If your investment strategy is to sell stocks when you're nervous and buy them back when you're confident, you're setting yourself up for disaster.
When stocks are rising, the expected returns shrivel as investors pay higher prices for a claim to the company's future earnings. Think of a bidding war in an auction. If there are many bidders for a painting, there's a good chance the price will be inflated. That's an auction you don't want to win.
Stock prices also can be driven to unrealistic levels in the short tern due to rampant speculation. And it's during these times that buying stock often feels like the right thing to do.
On the other hand, stocks tend to bottom out and become most attractive when investors feel horrible about the market. Some investors only buy stocks when other investors are selling.
If you dump stocks when you're nervous, you're essentially selling discounted goods to someone who will profit from your short-term fear.
It's so difficult to know when to get in and out of the market, that back in March when stocks were in freefall, some investors bailed out, at precisely the wrong time. Here's one.
This has been a long-winded way of saying your plan won't work if you want to jump back into some blue-chip stocks for a quick gain. If there's a short-term correction, you would probably get scared and sell, and lose even more money.
But if you're committed to investing for the long term, say seven years or longer, you might consider dipping back into the market with a diversified basket of large U.S. stocks, by buying the Vanguard Large-Cap exchange-traded fund vv. You'll want to hold onto it for a while, though, to make sure you capture your share of the rise in earnings and revenue of large U.S. companies. If you can't commit to that, you're probably better off in bonds and savings accounts.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz