How to Get Back in the Market for the Rest of 2019

So you pulled your money out of the market and now you’re having second thoughts. That’s natural. For all the talk of recession and trade wars, the U.S. economy remains remarkably resilient. It’s normal and prudent to lock in some gains.

But if you did a little, or a lot, more than just take a profit it may be time to get back in the market. Historically, investors that tried to time the market ended up with portfolios that underperformed the broader market.

So let’s walk through this together and create a plan for the rest of 2019.

Is it time to get off the sidelines?

I know, I just said it may be time to get back in the market. But it’s been a scary year for investors. After the meltdown at the end of 2018, stocks looked to be turning the corner. All the major exchanges hit record highs. But the trade war with China kept going … and going … and going. And corporations said that problems they felt were “off in the distance” were becoming clear and present dangers.

Then the yield curve inverted. And even the most bullish economists had to admit that the economy may have passed the eye test, but it didn’t past the smell test.

But when would the recession come? As recently as October 10, Minneapolis Fed President Neel Kashkari said he does not expect a recession this year. However, Kashkari did express concern about the U.S. economic outlook but expects the current expansion to continue.

“My base case scenario is not a recession. I still think the U.S. economy is going to grow, but the risks have materially increased to the downside,” said Kashkari.

That feels right. Many of us don’t like to think that the Fed has political motives. But many of us would like Santa Claus to be real as well. As the United States moves into an election year, neither the White House nor Congress wants a recession. The Federal Reserve has the ammunition and I expect that they will continue to cut rates. This may only be delaying the inevitable (and it may do more harm than good) but you have to invest in the face of what is actually happening.

You can’t go wrong with index funds and ETF’s

If you have a low-risk tolerance, index funds and exchange-traded funds (ETFs) are an ideal way to get capital appreciation. These funds track an entire exchange (like the S&P 500) or a sector (technology, small-cap, etc.). The goal of the fund is to achieve the same performance as the sector or exchange. So, if the S&P 500 is up 15% for the year, an index fund that tracks the S&P 500 should also have a gain of around 15%. Because these funds are not looking to outpace the performance of their particular index, they are passively managed. This keeps your expense ratios low.

The best offense is a good defense

If you want to invest in individual stocks, you should be looking for defensive stocks and preferably in sectors that will have less exposure to China. These might include defense stocks and utilities. These aren’t always the most glamorous performers, but you’re not looking for glamour right now. You want to be able to sleep at night knowing your investments aren’t going to drop 20% over a simple Tweet or a disappointing economic indicator. One benefit of these stocks though is that many offer dividends. Even if you don’t need the dividend for current income, you can reinvest the dividend as an easy way to grow your portfolio.

Don’t forget to diversify

If you’re a younger investor, you may be heavily invested in equities. And quite frankly, there’s no reason to change that strategy. Even if a recession was imminent, the money that is most at risk for investors would be the money they need in the next five years.

So for those of you that have the money you may need in the next five years, let’s talk about diversification. Now may be the time to look at bond funds. An alternative strategy is to create a bond ladder. However, with interest rates falling make sure you give yourself a little room between maturity dates to maximize your long-term yield. This is because interest rates and bond prices move in opposite directions. As interest rates fall, bond prices rise. And when bond prices rise, bond yields fall. Since you have to anticipate that interest rates will stay low for some time, bond yields will also be falling.

The first step is to commit

Investing in a volatile market can be scary, but this is no time to do the hokey-pokey. Don’t get in a cycle of “You put your money in. You take your money out.” If you’re going to invest, then invest at your normal ratios. If you’ve been 50% equities, get back in at 50%. Notice I’m not recommending you do more than your ratios. This is no time to get foolishly aggressive, but understand that this is one time when playing it too safe could backfire. Over time, the trend of the market has always been positive. With so many investment options to choose from, you can find the financial instruments that fit your investing goals, timeframe, and risk tolerance.