Q: I always seem to get in and out of the market at the worst time. The last time I got in was early 2009 and right back out a couple of months later. I panicked and sold as it looked like the market was going down a lot more than it did. I have been sitting in cash since and now I’m sure if I get in, it will immediately go down, leaving me in the same position as 2009. I’m 67 and can’t afford any more big mistakes.
A: This is the most common question I get, and the higher the market goes the more I get it. There is no easy answer. The industry commonly says to invest everything at one time, regardless of how high the market is. That advice ignores the human nature that leads to disastrous results for investors who overestimate their risk tolerance.
It may be the only way low-risk investors will survive the natural cycles of the stock market will be by applying two defensive strategies. The first defensive strategy is to limit the exposure to equities, no matter how high or low the market might be. It may be that a 30 to 40 percent equity position is the maximum equity exposure for these investors.
The second defensive step is to dollar cost average into the equity portion over several years. If it takes 2 or 3 years to get properly positioned in the right asset allocation, it’s better than finding yourself having guessed wrong again, often leading to giving up forever. The key is to find a mechani