Getting out makes sense, unless...

Tina Haapala |

By Gary Silverman, CFP®

Last week we talked about a couple of client cases I’ve had over the last year. Some folks got scared about what was about to happen, and had me get them out of the market ahead of the pending doom. The article premise: should you join them?

In essence, they wanted to abandon the kind of investing that I do and instead start timing the market. As regular readers know, I build and recommend portfolios that can withstand the ups and downs of the market. Well, these couple of clients didn’t want to ride things out…they wanted to get out. I’m guessing there are many readers who often think the same.

Let’s face it, with all the turmoil in the world, there are a lot of things that can go wrong. And given that 10 and 20 percent drops in the market are relatively common to begin with, it is highly likely that something bad will happen to your portfolio in the next year or two (not guaranteed, but likely). The question is: Do you ride it out, or get out now and get back in later?

History shows that, given time, riding it out works. After all, the market is higher now than it was at the start of the Great Depression, World War II, Korean War, Vietnam War, the Energy Crisis, our bout with hyper-inflation, the Tech Bubble, Terrorism, and the Financial Crisis.

But wouldn’t it be better if you could get out of the market before these events and get back in when they are over? Sure it is, and that’s why it is quite rational to want to do so. The problem is in the execution. After all, you have to know when the market is peaking and then when it is done going down. Let’s not forget that the market bottom is when everything looks the gloomiest. If you don’t like the way things look now, will you really like the way they look then?

I can’t know what the market did between when I wrote this and when you’re reading the column, but from where I sit, the stock market is way above where it was during the Financial Crisis. In fact, it was sitting on new highs. So getting out here isn’t a bad call…unless.

Unless the market goes up another 20% before it has a 10% correction…then you gave up a potential gain. Over the years I’ve had several clients go to cash before a market correction—but they would have made more money by just riding it out.

Unless the market drops 40% and you don’t get back in until after it recovered and then some…yes you avoided the drop, but you also avoided an even better gain. I’ve seen many people get out sometime before the bottom of the Financial Crisis, but who failed to get back in before the recovery was complete.

So, to summarize, the dangers of getting out before the next market debacle are getting out too early or getting back in too late.

Yes, I promise I’ll finally tell you what you should do next week.

This article was published in the Wichita Falls Times Record  News on January 8, 2017.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.