Looking to Jump Back Into Stocks? Now May Be the Right Time

An expected market dip could provide prime opportunity

0904_recovery_signLately, I’ve been feeling left out of the party. (And, no, it’s not because my bosses are busy whooping it up this week in Orlando at the Black Enterprise Golf & Tennis Challenge.) It has everything to do with not taking full advantage of the stock market rally that began March 9.

I’ll explain: Last year at about this time, as the markets were beginning their history-making nosedive, my wife and I took a third of our 401(k) savings out of equity-based funds. We left that portion of our nest egg in our account, but set it aside in cash, where it earns a minimal amount interest. It was a panic move, but one we didn’t regret—until recently. Over the past six months, as investors responded to improving economic data and stronger-than-expected corporate earnings reports, the S&P 500 index has gained nearly 50% since its March bottom. Mostly, our investments took part in the market’s resurgence. But still, I’ve had a nagging feeling that our sidelined cash should’ve been back in equity mutual funds sooner.

Of course, I’m not alone. Many investors made similar moves last year, socking away portions of their invested savings into money market accounts or short-term bonds where it would be safe from the stock market mayhem. Still feeling a bit shell-shocked from losses, some haven’t put their cash back into the market.

For myself, and other somewhat sidelined investors like me, this autumn may present an opportune time to increase exposure to equities—at less expensive valuations. Here’s why: A number of market-watchers (Read here, here, and here.) expect that sometime this fall, the market is due for a slight pullback. For starters, over the last 50 years, the market has lost ground more often in September than any other month.

Aside from that, there’s been a recent surge in stock sales by corporate insiders, which is sometimes indication of a rally’s peak. In general, experts also believe that investors may have become overly excited by the prospect of a fast, and smooth economic recovery and corporate earnings reports that reflected, in many cases, gains from cost-cutting rather than top-line sales growth. Make no mistake– the U.S. economy is on track to recovery in 2010, according to most economists. It’s just that investors may have gotten a little ahead of themselves this summer. As Art Hogan, chief market analyst at brokerage firm Jeffries & Co., told the Los Angeles Times earlier this week, the expectation of a sharp pullback “is ubiquitous now.”

Investors shouldn’t be alarmed by the gloomy near-term outlook. A market pullback is a buying opportunity, a chance to ease sidelined cash back into stocks at more reasonable valuations. Look at these dour forecasts another way: as a 30-second TV ad for an impending sale at your favorite store. I’ll be watching—and hoping to make up for missing out on the rally. Who’s with me?

John Simons is the senior personal finance editor at Black Enterprise magazine.

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