The cost of being out of the market

When the stock market is volatile and uncertainty takes over, you may discover that being out of the market is more painful than staying in.

By MSN Money Partner Sep 12, 2011 1:45PM

By Adam Bold for U.S. News & World Report 

 

Recent volatility has been tough for investors. After a day of steep declines, stocks recover for a day or two. And just when you think the market had stabilized, prices drop again.

 

It's like trying to catch a falling knife. If you don't do it perfectly, there's a good chance you'll get hurt.

 

When it comes to your investments, you should avoid reacting to falling prices by jumping out of the market. In fact, being out of the stock market can prevent you from earning higher returns.

 

Here's an example: If you invested $10,000 in the Standard & Poor's 500 Index ($INX) on Jan. 1, 1989, never added another penny and stayed invested through Dec. 31, 2010, you would have ended up with $73,383. That's an average annual return of 9.5%, assuming all dividends were reinvested.

 

Let's assume you were out of the market for a single day, the index's best session in those 21 years. You would have ended with $65,767, 10% less from being out of the market just one day.

 

And if you were out of the market on the index's best 10 days in that time, you would have ended up with only $36,623. That's just half of what you would have had from staying put.

 

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These data show the potential cost to you if you play the market-timing game, of jumping out of the market when you think it's heading lower and back in when you think it's on the rebound.

 

Without an investment plan -- one that you believe in and takes into account your unique situation and goals -- you might be compelled to sell during down times. Any decision to get out involves a second decision of when to get back in. If you're like most investors, you'll wait too long and miss the rebound.

 

Remember, no one knows exactly when prices will hit bottom, and no one can accurately predict when prices will rise again.

Stocks don't go up all the time. Corrections of 10% or more are common and a normal pattern in stock market behavior. Every now and then, values can fall 20% or more. Fortunately, bull markets tend to last longer than bear markets.

 

No one likes to see the value of their investments go down. If you're very uneasy about how yours are performing, re-examine your risk tolerance and adjust some of your holdings. But you shouldn't make dramatic changes just because stocks are down at the moment.

 

Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice, and host of The Mutual Fund Show, a call-in radio program broadcast across the country.

 

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