Skip to content

You’re kidding yourself if you think you’ll know when to reinvest the cash you accumulated during the bear market of the past 18 months.

In fact, you will certainly be waiting for a very long time. That’s why you need to adopt a plan that spells out when and how you’re going to make a full return on investment.

I offer this advice not because I believe a new bull market has begun, although it very well may have. But I know you can’t base your reinvestment decision on when it “feels right”. That’s because reinvesting in stocks won’t “feel right” until the top of the next bull market. that’s when the news will be at its most positive extreme. We all need some plan of action to overcome the inhibitions we inevitably feel the rest of the time.

Fortunately, there are a wide variety of sensible programs you can adopt, and almost any of them will be better than doing nothing. Perfect is the enemy of good.

My inspiration for making these claims is a classic essay written by Jeremy Grantham in 2009. in March. Grantham, of course, is the co-founder of Grantham, Mayo, & van Otterloo (GMO), a Boston-based asset management firm. He argued that during bear markets, “those…who [are] Flowing cash won’t want to give up their shine easily.” So they will “watch and wait for their inertia to begin to concrete.” The longer they wait to come back and develop a plan, the greater the chance that “severity deadly enters”.

I suggested one such potential plan last July in a Retirement Weekly column, and it’s worth reviewing how that plan worked out. At the time, I suggested that you could “determine how much extra you would invest in the stock market to reach your desired level of maximum capital exposure, and divide that extra amount into five parts. Invest one tranche now and invest each of the other four in turn when the stock market moves up or down 5% from when you invested in the previous tranche.”

The accompanying chart shows how this program has worked in practice. Those who followed the plan returned to their target weight equity exposure by November and have maintained that level of exposure since then.

There are several important suggestions.

  • One is not particularly important, but it’s still worth mentioning because I’m sure you’re wondering: the program made money. last July the cash lump sum is now 5.4% higher. But this profit is not. You’d actually be better off in the long run if the stock market had fallen 25% or more in a straight line since last July, in which case last July’s lump sum would be down to a loss right now. However, your average purchase price will be much lower, which in turn will lead to better long-term performance.
  • Most importantly, from a performance perspective, last July’s plan guaranteed that the average purchase price of your reinvested money would be lower than the stock market’s previous all-time high. That’s important because most investors who exit the market after stocks enter a bear market wait until the market recovers to new all-time highs before investing. By doing so, of course, they will lose ground compared to buy and hold.
  • The emotional/psychological advantage is that such reinvestment plans are relatively easy to actually follow. Sticking to it doesn’t require making any anxiety-inducing, all-or-nothing decisions about a whole lump sum. Instead, by splitting that amount into a series of tranches, you spread that worry over time. And while there’s no denying that a falling market increases anxiety, you can at least reduce that anxiety somewhat by realizing that the lower the market, the better your long-term performance will be.

I will repeat what I mentioned before, however. The special reinvestment plan I offered last summer is one of many you can consider. The important thing is to pick one and then stick with it.

Waiting too long to get back in

If you have any doubt about how difficult it is to get back into the market after reducing your exposure to stocks during a bear market, consider what happened to the late Richard Russell, the famous editor of Dow Theory Letters. I credit him with making the best market timing call of the last 40 years.

It happened in late August 1987, two months before the 1987 crash, the worst in US stock market history. Russell, speaking at an investment conference I attended, took the stage to announce that the bull market of 1982-1987 had ended at its highest close on August 25th. At the market’s post-crash closing low, the Dow Jones Industrial Average

DJIA:

it was 36% below its high in late August.

Despite thereby establishing this incredible lead in the buy-and-hold approach, Russell erased it over the next two years. He did not return to the stock market until late August 1989, two years later, when the DJIA was higher than where it had been at its 1987 peak.

My purpose in walking down memory lane is not to pick on Russell. My point instead is that if a successful market timer like Russell couldn’t make it back to the market in time, what makes you think you can do better?

Mark Halbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

[ad_2]

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *