On the Re-Entry Debate

What do you do now if you exited stocks during this year’s bear market? The New York Times ran a piece yesterday attempting to answer that question:

Once You’re Out of the Market, It’s Tricky Getting Back In
Brian J. O’Connor, The New York Times

This is a relevant topic worth highlighting, but we found the article itself a mixed bag. Several of the interviewed experts provide sensible, if cliché, advice (e.g., buy low and sell high), but they primarily focus on how to re-enter the market: tactics or strategies like dollar-cost averaging or waiting until a COVID-19 vaccine is available. The questionable wisdom of that advice aside, the article overlooks a simple but critical question all long-term investors must answer:

Why are you investing?

Your answer, in our view, should begin first and foremost with your personal investment goals. Are you seeking a particular lifestyle during your golden years? Do you want to leave a legacy for family or a charity? Something else? Those goals will determine the primary purpose for your money and how much growth you will need—which, along with factors like your time horizon and comfort with volatility, goes a long way to determining your asset allocation (your portfolio’s mix of stocks, bonds, cash and other securities). If you require long-term growth, we believe owning stocks should likely be a big part of your plan.

But owning stocks isn’t easy—especially when a record-fast bear market occurs. No matter how experienced or prepared you think you are, even the most steely investors can succumb to emotion and sell when they probably shouldn’t. When stocks began rallying in late March, most didn’t believe it would last. Many still doubt the upturn. But it appears to us a new bull market is now underway. There is a reason why Fisher Investments founder and Executive Chairman Ken Fisher calls the market “The Great Humiliator”—and it doesn’t discriminate, whether you are a regular investor or an industry titan. So what do you do now if you exited or sat on cash due to the extreme negative volatility? Seeing stocks stage a historic rally may be a tough pill to swallow. It can be even harder getting back in, as this may mean admitting an error.   

However, exiting stocks because of volatility isn’t the only problem. When any equity investor leaves stocks—a vehicle that increases the likelihood they successfully reach their goals—they simply must have a re-entry plan, in our view. That second decision—when you re-enter—is just as important as when you exit. The only way exiting stocks benefits equity investors is if they get in at a lower level than they left. But in markets, fear and market levels tend to move inversely—the lower stocks go, the more fear rises. We have seen too many investors exit on the notion they will re-enter at lower levels, only to let pessimism and panic dissuade them. By the time many investors “feel” better about re-entering, stocks have climbed and rendered the exit counterproductive.

Nothing about investing is easy, and those who remained disciplined throughout the bear market deserve tremendous kudos. But those who reacted emotionally and exited markets needn’t despair. Rather than dwell on the opportunity behind you, focus instead on your goals—and get on a path that is likely to help you achieve them.