The “perils of timing the stock market”: Bull market or bear market rally?

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The coronavirus-related uncertainty in the stock market has a lot of investors wondering what they should be doing with their money. The outlook may currently be bleak, but even that is subject to change.

“Maybe COVID is something that we’ll never cure and we’ll just be ruined for the rest of our lives,” financial adviser Arthur Stein said on Your Turn with Mike Causey. “I don’t happen to believe that.”

As Stein discussed the shrinkage of Thrift Savings Plans, he said that inevitable low corporate earnings this year will not be good on stock funds.

“The returns on the F Fund have been outstanding this year,” Stein said. The F Fund is tied to U.S. Bonds and is “a safer, more passive investment approach.”

Bond prices go up when interest rates go down. The U.S. has had falling interest rates, resulting in an F Fund up some 4% this year. It was also up last year.

“2019 was obviously good for the stock funds in the Thrift Savings Plan,” Stein said.

Then came “the decline” of mid-February 2020. The C Fund, make up of stocks, peaked on February 20, up 5% for 2020, at that point. Then it had a 34% decline.

Before that, the stock market had experienced the longest bull market, nearly 11 years, in U.S. history. A bull market describes a market that is on the rise.

“As the C Fund declined 34%, [the U.S. entered] a bear market, a 20% or greater decline from a previous high,” Stein said.

“Then, all of a sudden, it increased 29%, all in the space of about two months,” Stein said. “That means we’re now in a bull market, because it’s up 29%.”

Stein said the question so many people have right now: “Is the decline over? Is now when I put my money back in?”

Another concern investors have, in this context, is if the U.S. stock market actually is recovering and they don’t get back in, right away, will they end up worse off?”

“The perils of timing the market,” Stein said. “It’s just extremely hard to do.”

Stein said there is always the chance the U.S. is in what is called a “bear market rally,” which means a temporary rally in stock prices. If that’s the case, he said, “Sure, waiting is a good idea. But even if that happens, people still end up — at a later point in time — with the same, horrible, tough decision. Is this the end of it?”

“And when it starts going up, do I immediately get back in?” Stein asks. “Because it could start going up several times and continue to go down. I can’t make that kind of decision. I don’t try to make it for my clients.”

Stein’s rule of thumb has never really changed: “Just buy a well-diversified portfolio and then hang on.”

Time is usually on your side, as stocks out-perform bonds by a considerable and very significant amount, he said.

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