Is It Time to Get Back Into The Stock Market?

Should I get back into the stock market? You might be asking yourself this question if you had bailed out during the recent market downturn and watched it climbed almost 30% in March. I don’t blame you if you got out. Many people developed their investment strategy while the stock market was doing well, and this drop spooked many people. Some people even believe this to be the end of our financial system and that the stock market will never recover.

I can’t predict the future, but I do believe that the stock market will recover. This wasn’t the first downturn, and it won’t be the last. I also believe that investing is one of the best way to achieve financial freedom. As such, I think this is a great opportunity for investors to re-evaluate their risk tolerance and redefine their investment policy statement.

What Is An Investment Policy Statement (IPS)

An Investment Policy Statement, or IPS is a document that outlines general rules for making investment decisions. This statement states your investment objectives and describes strategies that should be employed to meet these objectives. Specific information such as asset allocation, risk tolerance, and liquidity requirements would also be included in an IPS.

For example, an Investment Policy Statement may look something like this:

Purpose Retirement savings.
Objective Saves $3 million.
Time Horizon 35 years.
Asset Allocation The portfolio will invest in fixed-income assets and equities based on the “120 minus age” rule. Additionally, (1) 50% of the equities portion will be invested internationally, (2) 50% of fix-income will be invested in Treasury Inflation-Protected Securities, and (3) 25% of equities will be invested in small cap investments.
Rebalancing Rebalance the portfolio when fixed-income or international assets are out of target by more than 5%.
Performance Expectation Equity investments are expected to return on average 8% per year and fixed-income 4% per year. However, actual performance will fluctuate, but it should be comparable to appropriate indices.
Investments Eligible investment includes mutual funds and ETFs that meet specific asset allocation requirement and has total expense that is in the lowest quartile of its class. Additionally, investments that has front-end load and redemption fee are not eligible.
Contributions Contribute the maximum amount to Roth IRA and at least 10% to 401(k).
Redemption At 65, start withdrawing no more than 4% per year.
Market Changes Use rebalancing to adjust to changes.

These are just a few points that you want to include in your IPS. However, your IPS will probably be more detailed and more specific than this basic example. It’s also important to note a few things:

  • Your IPS probably won’t be perfect the first time you create one.
  • Your IPS can change over time to incorporate new knowledge and life changes.
  • Your IPS should include provision for what to do when the stock market makes sudden changes. However, don’t change your IPS in reaction to the stock market.
  • If you are not comfortable creating one, you could consult a professional, or just create one and keep improving on it as you learn.

The important thing to learn here is you should have an investment policy statement, even if it’s a simple one. Your policy should be detailed enough to help you make objective decision in different market conditions. The goal is to have an IPS and stick to it so that you’re not reacting emotionally to changes in the stock market.

Also, check out ABCs of Investing for more information on Investment Policy Statement.

About the Author

By , on Apr 19, 2009
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo have enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (8 Comments)

  1. Al says:

    Ok. You have good points and I would like to take the time to do that. But, I was in the market and lost 65% of my retirement plan and then got bad advice from someone and lost even more by putting everything into reserve. Now when I want to get back in the MF I had before are 50% higher and double what they were and I’m kicking myself.

    I would like to see a financial planner but the last time I did that I waited for ages for his advice (diff than above) and went from $18,000 to $8,000 then he said, invest with me…now I’m scared of changing companies and of listening to anyone and my money is still in reserves while the old MF I had are looking a lot better.

    I’m so scared to lose again. I feel helpless. I want to put it back in, but will they fall hard again? And I’d like to put a huge lump sum in the one that’s doubled, but my fear keeps me from doing that or moving at all again.

  2. MoneyEnergy says:

    It’s a good idea to have a general goals and policy statement, even if implicit, and revisit it every year, even every 6 months. Rebalancing also doesn’t have to take the form of actually moving your money, but just redirecting new funds into the right allocations.

    SavvyMoney’s right that at the very least you need to be simultaneously building your emergency fund or two. My only hesitation about needing to do it *first* before any investment is that you can’t buy back that time in the market. So my own preference is to be working at it all at once.

  3. SavvyMoney says:

    For people that revolve non-mortgage debt from month to month, getting back into the stock market CANNOT take priority over paying down existing debt. I would even argue that, for those with income insecurity, getting into the stock market should take a back seat to two particular actions: (1) setting up an emergency expense fund for medical, food, and transportation costs; and (2) setting up an emergency fund for swinging the monthly mortgage payment – at least 3 months of a reserve for this. The risk in losing the house needs to be mitigated far more readily than the foregone incremental gains in stock investments.

  4. Mike says:

    Thanks a lot for the link!

    Mike

  5. Good to read this .. Proper planning and execution is the crux of the matter..All great thinsg are achieved by good planning and great execution… This was well explained in here.. Thanks for this..

  6. Pinyo says:

    @SJ – Thank you. It doesn’t have to be complete or perfect the first time around. As long as you keep building on what you have, you should be fine.

    @Wealth Pilgrim – Yes 2008 was tough.

    As far as risk tolerance issue, this is how I would address it. Your risk tolerance should dictate your asset allocation, and not whether you should be in or out of the market. So if your risk tolerance level only allows you to lose 10% a year, you should be heavily investing in fixed-income in the first place. If your fixed-income allocation becomes heavy due to decline in equities, then you should rebalance your portfolio according to plan.

  7. I have only one problem with the IPS. Investors complete them thinking their investment risk tolerance can be adhered to. i.e. If the client is comfortable with losing up to 10% in a year, that threshold could be exceeded (think 2008). Then what? They throw the baby out with the bath water.

  8. SJ says:

    Hehe… this post is great.

    I wrote up on objectives/strategy/tactics and this falls into the framework perfectly.

    I admit I have no real objectives now… but we’ll see what happens =)

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