The latest figures show the rate of job losses at its lowest level in a year. The housing market is perking up. The stock market’s been on a tear since March.
So is it time to move cash from the sidelines into stocks?
That’s a trick question. Most experts say individual investors preparing for retirement and other long-term goals should stay in the market all the time.
Otherwise, it’s hard to resist the urge to jump ship when the market drops and then wait for a convincing recovery before tip-toeing back in, possibly waiting too long. That equates to selling low and buying high, the opposite of what you should do.
Moving in and out renders a long-term investment plan just about worthless, because no plan can account ahead of time for these frenzied changes. Tools like the Savings, Taxes and Inflation Calculator ask you to select figures for investment returns, inflation, initial savings amount and additional monthly contributions, and then they calculate compounding over the period you specify. Pulling a big sum out of stocks and putting it into cash throws the calculator a curve.
One of the trickiest steps in planning, of course, is estimating investment returns. Most people draw from past patterns. In the 20th Century, stocks returned around 10% a year on average, bonds a bit over 5% and cash 3% or less. The studies that produce these figures assume that the sum invested at the start of the period continued to be invested the whole time.
Not only that, they assume that all interest earnings, dividends and mutual fund capital gains distributions were reinvested. Anyone who drew income out of their accounts would have ended up with substantially less at the end of the period than those who did not.
The past year has been the kind of roller coaster that demonstrates the perils of trying to time the market, or figure the best points to move money in or out. A year ago, the Standard & Poor’s 500 (Stock Quote: MHP) was at about 1,300. By early March it had tumbled to about 675, a 48% loss. Now it’s at just more than 1,000.
An investor with a crystal ball could have made a bundle by pulling out of stocks a year ago and returning to the market in March. But an investor not able to see the future might have waited until March to cash out, suffering all the losses of the previous seven months. If the investor had waited until now to get back in, the 48% gain since the March low would have been missed.
What if you are sitting on a wad of cash that needs to go back into the market?
Most experts say big sums should be invested in monthly installments over a year or so, reducing the risk of putting it all in just before a big plunge.
Before doing that, it would be worth spending some time experimenting with a good financial-planning program like Quicken (Stock Quote: INTU).
Also take a fresh look at your asset allocation plan, which determines how to divide your portfolio between stocks, bonds and cash. Quicken has allocation tools, and others can be found at sites like Morningstar.com (Stock Quote: MORN).
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