Should I Ease Back In?

Reader Rich is considering moving back in the market by allocating a small portion of his 401k. Here’s what he said:

Last March I sold all mutual funds in my retirement accounts at work and moved them into money market funds, currently allocating 100% of new monies into those money market funds.

My question is: In your opinion, should I begin allocating a percentage of new money back into the market in my 401K & 403B? I am satisfied to stay in cash but would hate to miss a 30%-40% increase even if I only have small monthly allocations of say, 2-10% going back in to the market.

I have heard several opinions lately advising people to get back in. One guy on CNBC said the only thing worse than experiencing a 40% decrease when the market declines, is missing a 40% increase when the market turns around. Well, I missed the decrease when I moved into cash.

Yes, there are many opinions floating around, especially on CNBC, as to what the best course of action might be. I have four reasons for you as to why you should stay put:

First, you are far better off than most investors by having avoided the sharp market drop. Congratulations!

Second, you have put yourself in the enviable position of not having to make up losses. So there is no reason for you to have to make panic decisions in trying to be afraid of missing a 40% rebound. Besides, chances are pretty low of the market first dropping 40% and then rallying 40%. That’s wishful thinking given the current economic circumstances.

Third, your plan is to allocate 2-10%. While that is a small amount to risk, it also will not make much of a difference on your overall portfolio performance even if the market decides that a Santa Claus rally of another 10% or so is warranted.

Fourth, as I have repeated mentioned, in my opinion it is questionable whether the real market bottom has been set in November. I think there is more downside risk, and you’re better off waiting for an actual trend reversal before committing your serious money.

However, if you consider a small portion of your portfolio “play money,” then by all means go ahead and take a chance. Just be sure that you never confuse your pile of serious money with your pile of play money, so that your investment priorities will always be in order.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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