Investor Alert

June 9, 2009, 9:59 a.m. EDT

Too Late To Jump Back Into Stocks?

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By Brett Arends

I got a desperate email last week from a woman who had sold all her stocks in panic in March and moved the money into bonds. She's watched share prices boom since then, and meanwhile some bonds -- Treasurys -- have been slumping. She doesn't know what to do. She asks: Is it too late to sell her bonds and jump back into the market?

I'm sure many people are in a similar quandary. The numbers show many ordinary investors dumped their stock market funds at the bottom of the market and bought bonds instead. Now they feel they have missed out and are feeling uneasy.

What should they do? Here are some suggestions.

--First and above all, don't panic. Some of the analogies people use about the stock market are wrong and downright dangerous. The market is not a ship leaving port, a train leaving the station, or a car accelerating out of the curve. So you do not have to run or take a flying leap to "get back on board" before the market "disappears out of sight." Relax. The higher shares go, the worse an investment they become anyway. There will always be good investment opportunities out there.

--Don't feel you have to make a big, dramatic move. You can go in stages and move maybe 20% of your portfolio at a time. Big moves are a big gamble, and they're rarely necessary.

--In situations like these, financial writers often pass the buck and counsel you to "talk to a trusted financial adviser." That's fine. But if you had a trusted financial adviser you probably wouldn't be in this situation. And finding a good one is a challenge. A financial qualification -- such as CFP, ChFC, CLU, or AAMS -- is a good start. But qualifications don't guarantee excellence. It's easier to find a good mutual fund manager than an adviser. You don't get a referral from your sister in law or a buddy at the golf course. And their track record is right there out in the open where anyone can see it.

--For example, good quality "market neutral," "asset allocation" and "absolute return" mutual funds can make a lot of these investment decisions for you. The managers have the flexibility to invest where they see the best opportunities regardless of benchmarks and other distractions. They can usually keep money on the sidelines if they don't find anything good to buy. Many of these funds hedge market risk through derivatives. Funds worth a look include Hussman Strategic Total Return /zigman2/quotes/204827253/realtime HSTRX +0.54% (HSTRX), Federated Market Opportunity (FMAAX), Leuthold Core /zigman2/quotes/207520502/realtime LCORX +1.00% (LCORX), FPA Crescent /zigman2/quotes/203740457/realtime FPACX +1.36% (FPACX), and BlackRock Global Opportunity /zigman2/quotes/205546109/realtime MALOX +1.20% (MALOX). (These funds will probably underperform a raging bull market, and outperform a bear market.) They can be a good part of the solution.

--Some commenters will also tell you to "focus on your long-term goals" and consider your "risk tolerance." Obviously, within reason, this is common sense. For example, you shouldn't keep money you may need in the next few years in the stock market. But beyond that these nostrums aren't as helpful as some would have you believe. A 10-year investment portfolio and a 30-year investment portfolio actually have similar aims: To get the best possible return with the minimum risk. And, "risk tolerant" or not, I don't know anybody who wants to lose money.

--Also beware anyone who advises you to invest more aggressively to catch up. There is a widely repeated theory that investors who heavily invest in more risky assets automatically earn higher long-term returns, despite volatility. Phooey. This must be why Warren Buffett, who puts a premium on capital preservation, has made so little money. Or why steady-Eddie "value" stocks have actually beaten growth stocks for decades. The best returns don't come magically from the most volatile investments. They come from buying undervalued investments and staying patient.

--What's undervalued? Alas, there is no perfect answer to that question. But as my colleague Jason Zweig pointed out on Saturday, level-headed investment guru Jeremy Grantham, chairman of Boston fund company GMO, says "high quality" U.S. blue chips remain good value and low risk even after the three month rally. These stocks have been left behind in the market's "dash for trash". Unfortunately, little else still looks cheap. Pickings seem very slim indeed.

--Finally, don't abandon bonds entirely. That's like abandoning stocks because they've fallen in price. Instead, take a look at what you own. Shorter-term and inflation-protected bonds are less exposed to any big surge in inflation. If in doubt, a managed bond fund such as Bill Gross' Pimco Total Return Fund, the largest bond fund in the world, should be fine.

Write to Brett Arends at brett.arends@wsj.com

US : U.S.: Nasdaq
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