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Is it time to get back into the market?

Shaken investors fled stocks in 2008. Return slowly, advisers say.

By Thomas WattersonCorrespondent of The Christian Science Monitor / January 5, 2009

John Kehe/Staff

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It may be hard to believe, but the stock market has actually staged a decent recovery from its low of just over a month ago. On Nov. 20, the Dow Jones Industrials closed at 7552 while the S&P 500 ended the day at 752. By the end of 2008, the Dow and the S&P 500 had advanced some 16 and 20 percent, respectively.

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As nice as those gains are, they have done little to make up for the massive losses investors have faced since the Dow peaked at more than 14000 in October 2007. Now, many of those investors are wondering if they can repair some of the damage to their portfolios – and how. Should they sell? (Maybe this uptick won't last.) Should they jump back into the market with both feet? Should they dip a toe in to see if the water's still too hot? Should they restructure their portfolios? If they do go for a makeover, should they put less in stocks and more in bonds? Should they include other options, such as real estate or gold?

There is, of course, no right answer for everyone, investment advisers say. "This market has tested people's risk tolerances, and now we know a lot more about where that is for each person," says Casey Mervine, a vice president and financial consultant at Charles Schwab & Co. Some people, he adds, may have had too much exposure to the stock market than they should have had, given their tolerance for risk or, more important, their financial situation or their age.

"We work with a lot of retirees," says Lyn Dippel, a vice president and senior adviser with Financial Advantage, a planning firm in Columbia, Md. "They don't have a long term. They're withdrawing every month from their portfolios."

Financial advisers who have been working with the same clients for several years have been extra busy this year communicating with those clients. For the most part, the message has been about the same, says Jerry Miccolis, senior financial adviser with Brinton Eaton Wealth Advisors in Madison, N.J. "We tell them … 'We recognize that you're nervous, some of you are borderline panicky,' " he says. "What's going on in the markets is an unmitigated disaster; we haven't seen the like of this for several decades."

Not surprisingly, many people have decided to "go to cash" this year and move all their stock and bond investments into money-market funds. While that may be the best plan for some people, most experts advise against it.

In most cases, Mr. Miccolis says, the best advice has been to stick it out, particularly if the client has had a well-diversified portfolio of stocks, bonds, and cash. "That has really been the best strategy, even in the wake of the Great Depression. If you had a nice diversified portfolio in 1929 and stuck with it, you would have done much better than just being in equities." The recovery of the past few weeks illustrates the risk of being out of the market for even a short time, he contends.

It's a different matter for newer clients. Many have already "cashed out," he says, and wonder how they should get back in.

There are basically two ways to go about it. If you are using mutual funds, for example, decide what mix of stock funds – domestic, international, small cap, and large cap – as well as bond and money-market funds you want. The first option is to go "all in" at once. That is, put all the money you plan to invest into those funds at once. This way, the money will be working for you right away.

The other option is a version of dollar-cost averaging. For many people, particularly those who don't have as much tolerance for risk, this can be a better solution. Unlike with the traditional form of dollar-cost averaging, where the same amount is invested every month for many years (employer-sponsored 401(k) plans, for example), in this variation, a certain percentage of the investor's money is invested each month for the next five or six months. For example, 20 percent of assets would be invested each month on the same date for five months. Doing it on the same day takes speculation out of the equation, Miccolis says. "We need to agree on a calendar date. We don't care what the market's doing; we just agree that on the 15th of the month, every month for the next five months, 20 percent will be invested."

If your portfolio just needs some tweaks, Mr. Mervine at Schwab says, get help developing an allocation that meets your goals and risk tolerance. Then put your current portfolio next to the recommended allocation and see what needs changing. You may find that some of the stocks or funds you currently own are in a good position to benefit from a recovery.

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