Conventional wisdom says investors should hang tough and ride out market declines. But a big plunge always drives plenty of people to the sidelines.
That happened in March, when investors pulled a net $326 billion from mutual funds and other pooled investments, according to data provider Morningstar. Much of that money is still on the sidelines.
Sometimes, it seems like investing is the only business where, when things are on sale, people run out of the store. Good investors should view market drops as an opportunity to buy, but as we see too often in our line of business, many people act against their own interests.
The sharp market recovery since stocks hit a bottom in late March was larger than usual but also is still in line with the kind of rebound investors can miss by trying to time the market. From the March 23 lows through quarter end, the market was up around 40%.
Missing out on gains like that is painful. Many investors regret hasty decisions to sell. And to make matters worse, getting back into stocks can be a more difficult decision than leaving the market in the first place.
That’s where having an advisor comes into play.
By turning to a financial adviser you can trust–one who is a fiduciary obligated to put your interests first–you can be more confident in your decisions. Having an advisor makes it less likely you’ll make a silly move like cashing out at the wrong time to begin with.
But let’s say you did not have an advisor and did the wrong thing, going to 100% cash out of fear. When should you get back into the market? There are two basic options: Jump back in just as fast as you jumped out, or ease back in with a dollar-cost-averaging strategy where you buy stocks consistently over time. There’s no single right answer.
Interestingly, the mathematically correct option is to invest it all today. Markets go up over time, and you want the most amount of time to benefit from compounding. But from a sense of emotional well-being, it’s completely rational to dollar-cost-average over a period of time that you’ve discussed with your Azzad advisor, whether that’s three months or three years. It’s their job to work with you to find a strategy that is best for your temperament and your financial goals.
And that’s a good practice for markets of all types.