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Investors agonize: Is it time to get back into stocks?

They're worried that a striking rally in the last three weeks will prove ephemeral. But they also fear that they could be missing out on a huge -- and real -- market recovery.

March 28, 2009|Walter Hamilton

NEW YORK — David Preefer sold his entire stock portfolio last summer because he feared that share prices, already down sharply from record highs reached in 2007, still had a lot further to fall.

It turned out he was right. But a striking rally in the last three weeks has the retired lawyer and many other investors across the country asking themselves: Is it time to get back into stocks?

Since hitting a 12-year low March 9, the Dow Jones industrial average is up more than 1,200 points, or about 19%, even after a nearly 150-point retreat Friday.

But Preefer, who had been waiting patiently for the right time to buy, is still waiting. He figures that the rally, driven by enthusiasm about the government's bank-rescue plan and early signs of a turnaround in the housing sector, will prove ephemeral. Bear markets are notorious for faking their deaths with powerful surges that stir a brief frenzy, only to give way to even deeper downturns.

Each day that share prices go up, however, Preefer worries that he could be missing out on a huge -- and real -- market recovery, and with it a chance for big profits.

"Every day I'm tempted to buy something," he said. "The hardest thing to do is to do nothing."

Small investors have long been derided in Wall Street's dismissive parlance as the "dumb money": historically late to sell during downturns and also late to buy after the market hits bottom.

Indeed, legions of shellshocked small investors have fled the market in the last several months, opting to take their money and run while questioning their long-term faith in stocks. For some, it could be years before they venture back into the market.

But the more intrepid investors who are itching to get back in are driven in part by a desire to be the smart money.

"What I've learned is you have to go against the flow of what everybody else is doing," said Larry Salibra, a 27-year-old founder of an Internet-based language-instruction company. "If you do what everybody is doing, you're going to get the results that everybody else gets."

Financial advisors generally contend that it's impossible for most people to know the right time to get in or out of the stock market and they shouldn't even try. Instead, the conventional wisdom says, most individual investors should build a balanced portfolio dominated by stock and bond investments, gradually reducing the proportion devoted to stocks as retirement approaches.

But after enduring two bone-rattling bear markets in the last decade, some investors question that "buy and hold" mantra and now believe that the best course is to move in and out of stocks based on the condition of the market and economy.

"It's now not buy and hold," said Patrick J. O'Hare, chief market analyst at stock research firm Briefing.com. "It's buy and hold and pay attention."

Nickolas Nakfoor, a 68-year-old retiree in Lansing, Mich., lost about half his net worth in the bear market and is now trying to recoup it.

"I've been hurt so much by buy and hold," he said. "You can't trust the market as a long-term investment anymore. You've got to get in and out to make some money."

Nakfoor diligently watches the market to time his reentry.

"I have various watch lists and I watch them every single day from the market opening until it closes," he said. "It's boring as hell because you're sitting in front of the computer."

Most of the investors waiting to pounce incurred bruising losses before stepping out of the market. Preefer's portfolio, for example, tumbled 19% in less than a year.

But they figure that to buy at low prices, they will have to step back in when economic conditions still seem grim. And although they expect it to take several years, they believe that the market will recover as it has after collapses in the past.

"There is a small subset of investors . . . following the market and trying to figure out when is the right time to reenter," said Pam Hess, director of retirement research at 401(k) service firm Hewitt Associates. "They want to opportunistically reverse their losses and not miss the bounce."

These investors know they can't pinpoint the exact bottom of the market, but they fear missing too much of the rebound, especially its often powerful initial burst.

"The day the market goes down they feel pretty good about being [out] and the day the market goes up they call and say they're concerned about being left behind," said Joe Montgomery, a broker at Wachovia Securities in Williamsburg, Va.

As investors have liquidated their stock holdings, cash has been piling up. The amount of money in checking accounts, savings accounts and money market funds has ballooned to $9.4 trillion, up 18% since stocks peaked in October 2007, according to research firm Leuthold Group.

Investment strategists typically view that cash hoard as a bullish sign, figuring that a good chunk of the money will at some point soon be used to buy stocks again.

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