NEW YORK (AP) — Now that there are signs of life in the stock market once again, many investors are getting back in. The problem is that they're doing it in the wrong way.
In the fourth quarter of last year investors started pulling out their money in droves. Through the end of March, they yanked $156.4 billion out of stock mutual funds, according to the Investment Company Institute. Bill Baldwin, president of Waltham, Mass.-based Pillar Financial Advisors, says his clients pulled hundreds of thousands of dollars out of stocks, even though he advised them not to.
Now, these same investors are looking to put their money back to work. They've watched the market spike 40 percent since its March 9 lows, and are convinced the good times are back. "People are willing to get back in now that the market has gone up," says Baldwin, who has been trying to coax cash-heavy investors to get back in. "It's frustrating." Stock mutual funds have seen a relatively small $29.1 billion in new inflows since mid-March, which suggests there is still money waiting to get back in.
The problem, of course, is that these investors have already missed a lot of the gains. The initial 24 months of a bull market usually posts 35 percent of its gains in the first three months, says Sam Stovall, S&P chief investment strategist. But there's mixed opinion as to what's next. Some analysts say the market is probably going to trade in a range for a while, without making any more substantial gains. Still others fear declines could be on the horizon, as the market has heated up too fast while the economy is still fragile.
But investors haven't missed the opportunity to get into stocks for the long term. Just don't try to pick the "best time" to make the move.
Some big investors are trying to do just that. According to Jeff Rubin, director of research for Birinyi Associates, a research and money management firm based in Westport, Conn., 37 percent of the market's daily gains occurred in the last hour of trading since the March 9 low. That's more than triple the 10 percent gains seen in the last hour of trading during the first part of 2009.
These late-day rallies are characteristic of early bull markets. "At the end of the day, you see the market heading higher due to investors who are worried about missing the chance to put money to work," says Rubin. This is especially common on days when the market dips earlier in the day, as investors try to "buy the lows."
While the late-day rallies are a bullish signal, dropping a big chunk of change in at once is not the best way to buy stocks. Baldwin says he has investors who are comfortable with stocks again on a dollar-cost averaging program. Under such a plan, he invests a set amount the first month of every quarter. The time-honored strategy reduces the hurtful effects of big market swings and bad timing choices.
Trying to time the market is costly. In the past 20 years, dollar-cost averaging would have generated a 57 percent better return over a typical market-timing strategy, according to research group Dalbar. For example, an investor who dollar-cost averaged $10,000 into the S&P 500 would have wound up with $17,037. A typical investor who tries to time the market by jumping in and out would wind up with just $14,485.
The fact is, many investors are still trying to time the market, even though we've heard it's the wrong thing to do. What's motivating this behavior? "People will work harder to avoid pain then they will to obtain pleasure," says Baldwin. The fear of losing money was greater than the fear of not making money until stocks posted a dramatic and convincing three-month climb. Dalbar's researchers also say investors tend to overreact to market news without thinking it through, often expect to get big returns with little risk, and tend to follow the herd.
Investors would have been best served by sticking to their already-decided stock, bond and cash allocations by periodically readjusting during the bear market. Over time, rebalancing to keep allocations relatively steady means buying low and selling high.
At the most, Baldwin says investors who have become more or less risk-averse should simply make allocation adjustments of 5 percent. So investors who were getting nervous about stocks could have pared their stock allocation from say 55 percent back to 50 percent, and put the rest in cash or bonds. There is rarely a good reason to make bigger portfolio moves, which can exacerbate the effects of market-timing attempts.
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