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Abandoning stocks when they are sinking may be tempting. But how and when will you get back on board?
By Brian J. O’Connor
The standard wisdom says investors should hang tough and ride out market declines. But a big plunge always drives plenty of people to the sidelines.
That happened in March, when investors pulled a net $326 billion from mutual funds and exchange-traded funds, according to Morningstar. Much of that money is still on the sidelines. What’s more, plenty of people never got back into stocks after the last big bear market in 2008 and early 2009, missing out on a decade of gains.
“Jumping out of the market is a mistake, but staying out compounds the mistake,” said Greg McBride, chief financial analyst for Bankrate.com, which tracks bank savings and consumer loan rates.
To make matters worse, getting back into stocks can be a more difficult decision than leaving the market in the first place.
“We’ve spoken to many people where the amount of scar tissue they had from the financial crisis of 2008 and 2009 was still there a decade later,” said Meb Faber, one of the founders of Cambria Investment Management.
Ideally, he said, instead of abruptly abandoning stocks when they decline, shrewd investors will view market drops as an opportunity to buy — and have the financial wherewithal to withstand short-term losses. But many people act against their own interests, he said.
“Investing is the only business where, when things are on sale, people run out of the store,” Mr. Faber said.
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