How to get back in the market

Christine Benz: Hi, Jason, nice to be here.

Stipp: We're hearing a lot from our members that a lot of them have gotten out of the market completely. They're not in the market anymore. So this suggests to me that they're sitting on the sidelines watching the market slowly creep up, with some volatility, and wondering how in the world do I get back in, when should I get back in? There's still some uncertainty out there, but they've already missed so much market gains. What do I do now?

Benz: There are so many people in that camp, I think, Jason. Just to start out, this is precisely why I would advise against using an active strategy, or a market-timing strategy you might call it. Because while it might yield some sense of emotional gratification when you do get out of a tough market environment--like maybe back in October of '08 or March of this year--you're left with this nagging sense of: Is it time? Is this the right time to get back in?

And what I would say is there are never red lights flashing, no alarm bells saying, "Yes, it's the right time to get back in the market." So this is why I would advise against using a more tactical asset allocation approach.

But my advice would be that if you are in the position where you've got a lot of cash on the sidelines and have been watching the market go up, up, and up, I would definitely think about some dollar cost averaging strategy.

So the last thing you want to do is take all the money you have in cash and say today's the day, it's all going back into the market. Instead I would step back and say, how much cash do I have? And think about putting it in at regular intervals and in systematic amounts, predetermined amounts, over a period of, say, 6-12 months probably.

Stipp: OK. Let's say that I am sitting on a pile of cash and I do figure that I'm going to put it back into certain segments of the market. How much cash should I keep aside? Does it make a difference if I'm retired versus still working? How much of that cash pile should I deploy again?

Benz: Well, for each of us it's an individual decision. For working people I would say you probably want to think about having 6-12 months in cash. If you're retired, I would think more about having, say, 2-5 years worth of living expenses held in cash. So totally on the sidelines, and totally apart from any long-term asset allocation framework you might have, which may or may not include cash.

And incidentally I would say cash yields, real cash yields, so what you might earn on a CD or a money market account--those are really low right now. So if you are retired, you might want to think about keeping your true cash at the low end of that 2-5 year range, and maybe parking any excess that you want to keep safe in a high-quality short-term bond fund.

Stipp: OK. So first I make the decision how much cash to redeploy, and then in the cash that I do decide to put back into the market, how do I get a sense today as to where I should be putting it? How much in bond, how much in stocks, and how do I form that plan?

Benz: That's the big question for every investor. One thing I would say is this a place where a financial advisor can be a lot of help, because while there are a lot of great tools out there on the Internet for figuring out your asset allocation, there's nothing like customized advice. So that's something an advisor can help you with.

But if you are a DIYer, I have a couple of ideas. First of all Morningstar's Asset Allocator tool is a neat tool, because it does harness your underlying portfolio data, so it's able to actually look at what you've got in your portfolio currently. And you can fiddle around with it and see, given what I want to accomplish, given the income that I want during retirement or whatever it might be, you can tinker with your real portfolio to see where you should be.

Another idea, a quick and dirty idea, for determining asset allocation, is to look at some of these target date mutual funds. They're not all created equally. Some of them, in fact, imploded in 2008. But I do like the target date series from Vanguard, which is a little more conservative, and T. Rowe Price, which tends to be a little more aggressive and stock heavy.

What you could do is look at a fund that matches your anticipated retirement date. Just kind of see what its asset allocation mix is. See how much it has in foreign stock, bonds, cash, and U.S. equities.

Stipp: So even if you are a DIYer and you don't intend to go the target date route, you could get a lot of information about what sort of range you should be in just by looking at how these target date funds are allocated.

Benz: Exactly. And I would sample a few of them to get a range of different advice. But I think that can be a good way to find that asset allocation baseline.

Stipp: OK. Last question for you. Let's say I'm one of the lucky ones that didn't pull all my money out. I was riding it out; I was trying to stick to my guns. But now when I look at my investment statement, I see that some of my allocation targets are a little bit different than perhaps they were a year or a year and a half ago, because of all the volatility in the market.

What are some of my options for getting back in line with what I've determined is my perfect allocation for my situation?

Benz: I think finding that baseline, so finding out what is an appropriate asset allocation framework is job one. And then for that person I would also recommend a strategy, rather than doing it all at once, of kind of gradually tipping the portfolio back in line with the recommended allocation.

Stipp: So my future contributions, maybe direct them a little bit differently so that over time, through those contributions, I get back in line with my original plan.

Benz: Exactly.

Stipp: Great. Thanks so much for your tips today, Christine. I really appreciate it.

Benz: Thanks, Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.