Out of the Pan and Into the Fire

One of the reasons we abandon a well-designed investment plan during scary markets is that we believe that if we just get out it will relieve the stress, pain, and anxiety.

If we can just move to the sidelines until things clear up, we believe that it will make us feel better. At least that is the story we tell ourselves. It is important to understand that the desire to flee to the perceived safety of cash is a genetic trait. It is human to want to get rid of things that cause us pain.

The problem: any stress that is relieved by getting out of equities is quickly replaced by the stress of having to wonder when you should get back in!

Think of the last few days:

Last week, over $40 billion fled the fear of equities and went to cash, with over $8 billion on Friday alone. That is $8,000,000,000 in one day!
Some of that represented people who had no plan and most likely have sworn off the stock market forever (or at least until it hits new highs and Jim Crammer starts pounding the table again, “BUY, BUY, BUY”).
The rest is made up of people that have well-crafted, long-term plans, but have temporally fled to the safety of cash (we call this market timing).
The market timers felt better over the weekend.
Monday morning, the relief they felt was replaced by the stress of wondering: “WHEN DO I GET BACK IN?”
Then to compound that stress, the market had its best day since the Great Depression.

What do you do now? Do you wait for the market to come back down? Will it come back down? Did you miss it?

Independent of what the market does over the next few days, weeks, or months this is clearly a case of jumping out of the pan and into the fire.

Update: The New York Times reinforces this argument with a piece about the desire to switch to cash.

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more…A guarantee of a small loss may sound good right now. But if you’re not bailing out of stocks once and for all, how will you know when it’s time to get back in? The fact is, any peace of mind you gain by being on the sidelines now will turn into a migraine once you see how much you can harm your portfolio over time by missing just a bit of any rebound.

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