Reinvesting: How to Get Back In
Last month I recommended that folks with investing timelines beyond five years should hang in there and hold on to their equity investments, if possible. Today I'm sharing thoughts for anyone who moved to cash and is trying to figure out how and when to get back in.
When the markets are in free-fall, many investors sell stocks because they can't stand seeing the value of their portfolios drop further. I completely understand the feeling. Many folks sell on the dip and plan to buy again after the worst has passed. It's an idea similar to the "Buy low, sell high" philosophy, except that unfortunately it reverses the order of those two actions. The problems become apparent when you realize that no one can tell you the perfect moment to sell or when to buy back again. There is no announcement at the exact moment when the markets start to descend into a crash or when they bottom out before the rebound.
No one can tell you when the worst is over, or guarantee that, from this day forward, the markets will only go up. It may be comforting to know that some of the greatest minds in investing are revered because of their ability to admit that they don't know exactly what will happen next. Accepting that fact allows them to develop strategies to move forward that mitigate risk while maximizing the likelihood of achieving long-term goals. If you sold equities in the last two months and want to develop a plan for reinvesting but you don't know how, please do yourself a huge favor and read this one-page paper by investing legend Jeremy Grantham called Reinvesting When Terrified. It will only take you five minutes to read, but it could change your investing outlook forever. He wrote it in March 2009 and it outlined his strategy for buying stocks at a time when it seemed like the markets might never go up again. And it's actually a pretty entertaining read. He recommends a phased approach for reinvestment. Making a small number of moderate-sized purchases -- spread out over a period of time -- diversifies your buying prices while ensuring that you are fully reinvested before too much time goes by. This will prevent you from missing the rally entirely and waiting on the sidelines forever, which is the greatest risk of selling during a crash.
I'll leave you with this brilliant line from the paper:
"Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure."
Accepting the reality that there is no way to be 100% sure what will happen tomorrow is the first step towards developing a plan for today.