by Karen Telleen-Lawton, Noozhawk Columnist (read the original in Noozhawk by clicking here)
If politics isn’t driving you crazy, then the stock market surely is. While the federal administration defies every convention, the bull market has roared blithely on through its ninth year.
At press time, this rally is the second-longest period on record without at least a 20 percent drop in the S&P 500.
Many investors pulled out of the market over a year ago. They correctly anticipated the chaos of new administration’s actions, but they didn’t expect that the market would not reflect it right away.
So now they’re sitting on the sideline, having missed another banner year. The S&P is 500 was up over 17 percent for the year while the Dow Jones Industrial Average rose more than 22 percent.
Market watchers quip that this reflected strong corporate earnings and the anticipation of a massive tax cut.
If you’re in the position of having left the market, how long should you stay out? How long can you wait for the inevitable correction? The answer is a resounding, “it depends.”
The majority of us need to be in the market to meet our financial goals over our lifetimes. We need to participate in economic growth to counter the other inevitability of inflation.
Successful market timers can be named on one hand; the rest of us will be successful by being there in the long run.
How do you get back in? Do-it-yourselfers need to decide how much to commit, what to invest in, and when to make the leap. The next correction may be today or it could be months or years away.
The average business cycle is about six years: five years of expansion followed by a year of contraction, according to Investopedia.
Given this, it is important to keep liquid any funds you may need over the next business cycle. Your emergency fund and any potential big-ticket items over the next six or more years shouldn’t be in the market.
You can lower your timing risk by investing over a period of time. The period depends on your comfort level: it could range from a quarter of your investable funds each week for a month, to a tenth each month for ten months.
Resolve to start now, regardless of today’s political or economic news.
Then, instead of obsessing over when might be the next crash or rally, systematically adjust your portfolio a few times a year to rebalance back to your agreed-upon asset allocation such as 70 percent equities and 30 percent fixed-income.
Over time, this strategy forces you to sell high and buy low.
Is there a situation when you should just stay out of the market? If you are close to retirement and are comfortable being in cash, you can check with a financial advisor to see whether you’ve saved enough to last your projected lifetime.
Investors who expect to live a couple of decades or more likely require the expected return of the market to keep up with long-term inflation.
Just like taking a shopping list for the grocery market, you need a plan for the stock market, and the discipline to stick with it.
Don’t go to grocery shopping when you’re hungry, and don’t trade stocks when you’re panicking. If you’re a binge shopper, best get help from a fee-only financial advisor.
Karen Telleen-Lawton, Noozhawk Columnist
Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.