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Is It Time to Get Back Into The Stock Market?

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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:

PurposeRetirement savings.
ObjectiveSaves $3 million.
Time Horizon35 years.
Asset AllocationThe 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.
RebalancingRebalance the portfolio when fixed-income or international assets are out of target by more than 5%.
Performance ExpectationEquity 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.
InvestmentsEligible 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.
ContributionsContribute the maximum amount to Roth IRA and at least 10% to 401(k).
RedemptionAt 65, start withdrawing no more than 4% per year.
Market ChangesUse 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.

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SJ
SJ
14 years ago

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 =)

Wealth Pilgrim
14 years ago

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.

RAJEEV KUMAR SINGH
14 years ago

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..

Mike
14 years ago

Thanks a lot for the link!

Mike

SavvyMoney
SavvyMoney
14 years ago

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… Read more »

MoneyEnergy
MoneyEnergy
14 years ago

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.

Al
Al
14 years ago

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… Read more »

Is It Time to Get Back Into The Stock Market?

by Pinyo Bhulipongsanon time to read: 2 min
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