Harry Peterson
All posts from Harry Peterson
Harry Peterson in Investing & more!,

How to buy stocks now if you’ve missed this massive bull market

Steps to take if you’ve been on the sidelines


Have you missed the rally? Here’s what to do now.

Investors are notoriously bad timers. That’s why most advisors and pundits encourage a buy-and-hold or a buy-and-rebalance investment strategy.

Indeed a look at equity mutual fund flows on a monthly basis compared to the rise of the S&P 500 Index SPX, +0.35% over the past seven years paints a poor picture of investor behavior. The single biggest monthly outflow during this stretch was more than $70 billion in October 2008, while the strongest and most consistent inflows over the past six years came from 2013 through early 2014.

Late 2008 wasn’t the exact bottom of the bear market, but it was close. That was no time to sell. Also, when 2013 began, and a wave of buying ensued, the market had already more than doubled from its early 2009 low.

So if you sold in late 2008 or early 2009, here’s what to do now.

First, acknowledge your mistake, but don’t gnash your teeth. Failure to acknowledge the mistake and excessive dwelling on it are both unproductive, and can cause further damage. If you don’t admit what you did wrong, you’ll likely do it again. And if you dwell too much on it, you might move all your money into stocks now. Neither approach is reasonable.

Second, once you’re calm enough, try to figure out what a good allocation to stocks is for you, and vow never to change it. The best investors aren’t necessarily the ones with the highest IQs, as Warren Buffett likes to say. Rather, they are the ones who are most disciplined and can stick to a plan.

Whatever your percentage in stocks was when the market crashed, it was too much. We know that because you sold. This time, aim for lower exposure to stocks so that a market plunge won’t feel so painful. The best stock exposure for someone is usually the most they can handle without being shaken out during a bear market.

That level of exposure is hard to know ahead of time, but remember how you behaved in 2008, and you’ll have some idea. Let the experience of 2008 help you calibrate what the right stock exposure is for you. Again, once you decide, stick to it.

Ideally, you want to have an amount of stock exposure that encourages you to add to stocks when they decline, not sell them. That’s what the rules of rebalancing dictate.

A balanced portfolio (roughly half stocks and half bonds) is a tried and true approach. It will almost certainly provide poorer returns over the next decade or more than it has in the past, with the 10-Year Treasury TMUBMUSD10Y, -0.80% yielding near 2% and stocks arguably expensive by many metrics. But if this can stop you from selling low next time, do it.

If you’re looking for a one-fund solution, the Vanguard Balanced Index FundVBINX, +0.13% is a fine, low-cost choice.

Third, if you’re sitting on a lot of cash, move it slowly and deliberately. There’s no need to achieve that balanced exposure (or whatever exposure will prevent you from selling next time) today. You can move it gradually over the next two or three years. Every month add a little bit to a balanced fund or a group of funds in proportions that constitute your target allocation. This is called “dollar-cost-averaging” in financial jargon.

If a market plunge occurs before you’ve put all your money to work, welcome it as an opportunity to buy at a lower price. Don’t deviate from your two- or three-year time frame though. Remember that the market declined 50% from its pre-2008 peak to its March 9, 2009 bottom, so even a 20% or 30% decline may not represent a bottom.

Stick to your plan, and don’t worry about catching the bottom. If the market declines sharply over the next two or three years, and you’re dollar-cost averaging, you’ll likely buy plenty of shares low enough to make you happy after a decade.

If the market stays where it is or moves higher, that’s not so bad either. It means you will have made some money. It also could mean corporate earnings have caught up to the recent price surge, making stocks less expensive.

John Coumarianos runs the website, Institutional Imperative, and focuses on value investing and behavioral finance. He formerly was a financial writer at mutual-fund company Capital Group and a mutual-fund and equity analyst at investment researcher Morningstar Inc.