Dear Carrie: I moved everything in my retirement account into cash and CDs in October 2007, so I am about where I was 15 months ago. Is now a good time to start putting cash back into equities? -- A Reader
Dear Reader: I just took a look at the chart for the Dow Jones Industrial Average for the past five years. On Oct. 9, 2007, the DJIA closed at a peak of 14,164, so I'd have to say it looks like your timing was impeccable, whether by design or by luck. You got out at the peak, and now you're hoping to buy back in at the bottom.
But the fact is that the bottom (like the top) is impossible to recognize except in hindsight. You wrote your question sometime in February or March of 2009, when market sentiment was incredibly gloomy and investors were reluctant to commit new money to the stock market. In fact, on March 9, the DJIA closed at 6,547 -- considerably less than half of the peak posted less than two years before! As I write this column in the middle of May, just a couple of months later, the market is up about 2,000 points, nearly a third from its low. Was March 9 the bottom? Sure looks like it today, but what will next week, next month or next quarter bring?
The fact is that nobody knows, and unfortunately, market timing just isn't a reliable strategy. Of course it is possible to make educated guesses, and you can get lucky, but you shouldn't confuse luck with skill. What I suggest instead is to invest consistently in ways that reflect your long-term goals.
One strategy that I like quite a lot, especially if your goal is long-term growth (which is probably the case for your retirement account), is "dollar-cost averaging," or investing the same dollar amount every month (or at any regular interval). With this system, you buy more shares when prices are cheap, fewer shares when they're expensive. Over time, your average share cost (what you actually spend) can wind up being lower than the average share price. Of course this system doesn't guarantee a profit or prevent loss (nothing will), but it does help you remove emotions from your investing decisions, providing you with the structure and discipline to invest consistently over time.
Another argument against "market timing" is that the stock market will generally rise in advance of an economic recovery (the current rally might be a harbinger of good economic news). So if you wait until you see signs of economic growth or a positive business environment, you may well have missed the biggest gains in the market.
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