When Should I jump Back In?
Over the past month, I've talked to more people about the stock market than at any point in my three decade career. People are angry, confused and worried and justifiably so. With good reason, this is regularly being described as the worst financial crisis since the Great Depression. While we don't know the outcome -- and it could certainly be less severe than the common fears -- the danger of a worldwide systemic problem is undeniable. Only a month ago, this was widely seen as only a Wall Street crisis.
On that basis, the House Republicans initially rejected the administration bail-out plan. Only when they saw it as a "rescue" plan for the economy, did they jump on board. In the meantime, the carnage has been spreading to every sector of the economy and around the world. Businesses, unable to obtain financing and worried about a long economic slowdown, have begun shutting facilities and laying off employees. While no one can forecast accurately, the most likely outcome seems to be a harsh and long global recession.
Given that, what's an investor to do? The natural instinct is to shun all risk and hunker down for the duration. For those investors who have acted on that impulse, it has served them well. Looking ahead, that may not be the proper course of action. One has to separate the economy and the stock market to plan for the future. The stock market usually discounts future expectations by many months. Typically, the market will rebound once the very worst of a recession hits. By the time a recovery is underway, the market generally has surged. In 1991, the broad market was up by 30 percent even though a recovery was not visible in the 1992 presidential campaign and for at least a year thereafter.
What about the idea of waiting for the all clear to sound? We know that it has not sounded yet and we can't even be sure that the worst is over. What we do know is that right now the market is moving back and forth by some of the biggest amounts in history. We also know that it never is clear what the market will do until long afterwards.
It's hard to know when to bail out and we applaud those who did so successfully. It's also extremely hard to know when to jump back in. Managing both is a tremendous feat that is statistically highly unlikely. For most people, we'd suggest that the best course is to judge your investment time horizon and how much risk you can bear and then with that in mind, stay the course.