When Is the Right Time to Get Back in the Market?
Recessions are an historical fact. In the United States the first recession to occur since the signing of the Declaration of Independence was the Panic of 1797. There was the Depression of 1807 and another again, the Panic of 1819. You get the idea. There have been a total of 22 recessions we have encountered since this country was founded. That is an average of one recession every 10.59 years since 1776. Have we been through this before? Yes. Unemployment, stock market declines or “crashes”, inflation, deflation, stagflation are all part of our vocabulary due to a rich history of experience, experimentation, and evolution of our current market system. Today we live in a society with the largest middle class historically. Much of this has to do with the evolution of economics from the very earliest of times. At any rate, WILL we recover from current market conditions? History tells us we will. WHEN will we recover from current market conditions? No one has a crystal ball although many pundits seem to have an answer for that. The issue is: when should we get back into the market if you have cashed out as a result of the market decline?
There are two theories regarding when to enter the market: Dollar Cost Averaging and Market Timing. Dollar cost averaging is the practice of investing a fixed dollar amount at regular intervals (such as monthly) in a particular investment or portfolio, regardless of its share price. In this way, more shares are purchased when prices are low and fewer shares are bought when prices are high. Dollar cost averaging is also called DCA and constant dollar plan. DCA reduces exposure to risk associated with making a single large purchase. Market Timing, on the other hand, is essentially dumping the full amount into the market, judging when the best time to invest is by various market indicators, and ultimately hoping that one “got in” at the bottom.
The argument for Dollar Cost Averaging is that if you miss the 10 best days invested in the market while you are waiting to buy in, you risk affecting your total return by a loss of 25%. The flip side of that coin is missing the 10 WORST days in the market you can change your total return upwards of nearly 38%.
The problem with Market Timing is the complexity of when to get in and when to get out of the market. Studies which have been done on Market Timing have highlighted that it is much more difficult than previously thought to time the market and emerge on the winning side, since exiting the market during down times would likely cause the investor to miss the positive market surges that follow. Nobody really knows what the market is going to do next. And studies have been done that show you need to be right 70-80% of the time just to beak even. Over 90% of Market Timers fail at achieving their goals.
The rule of the market is to not try to time the market. Emotional investing will more likely hurt rather than help long term returns. Suggestion: make the largest up-front investment initially. Absent the dollars up front, DCA is still a good idea. Being in the market creates positive long run returns, while being out of it creates only opportunity costs. The best advice in the long haul is always buy and hold. Work with an advisor, get in and stay in, despite market fluctuations. Perfect timing is merely hindsight.
There are two theories regarding when to enter the market: Dollar Cost Averaging and Market Timing. Dollar cost averaging is the practice of investing a fixed dollar amount at regular intervals (such as monthly) in a particular investment or portfolio, regardless of its share price. In this way, more shares are purchased when prices are low and fewer shares are bought when prices are high. Dollar cost averaging is also called DCA and constant dollar plan. DCA reduces exposure to risk associated with making a single large purchase. Market Timing, on the other hand, is essentially dumping the full amount into the market, judging when the best time to invest is by various market indicators, and ultimately hoping that one “got in” at the bottom.
The argument for Dollar Cost Averaging is that if you miss the 10 best days invested in the market while you are waiting to buy in, you risk affecting your total return by a loss of 25%. The flip side of that coin is missing the 10 WORST days in the market you can change your total return upwards of nearly 38%.
The problem with Market Timing is the complexity of when to get in and when to get out of the market. Studies which have been done on Market Timing have highlighted that it is much more difficult than previously thought to time the market and emerge on the winning side, since exiting the market during down times would likely cause the investor to miss the positive market surges that follow. Nobody really knows what the market is going to do next. And studies have been done that show you need to be right 70-80% of the time just to beak even. Over 90% of Market Timers fail at achieving their goals.
The rule of the market is to not try to time the market. Emotional investing will more likely hurt rather than help long term returns. Suggestion: make the largest up-front investment initially. Absent the dollars up front, DCA is still a good idea. Being in the market creates positive long run returns, while being out of it creates only opportunity costs. The best advice in the long haul is always buy and hold. Work with an advisor, get in and stay in, despite market fluctuations. Perfect timing is merely hindsight.
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