What to Do if You Missed the Rally

Last Updated Jul 31, 2009 3:57 PM EDT

If four grown men drinking beer on the White House lawn is a teachable moment for America, what do you make of a 48% rally in the stock market since March 9? It's "teachable," all right, but it's more than a moment--more like an entire remedial course in the unpredictability of stocks and the perversity of investor psychology, probably including your own.

Some indications:

  • A stat: In early March, the percentage of investors who were bullish, as measured by the American Association of Individual Investors, bottomed out at around 18%, about as close as you can get to coinciding with the market low. Fully 70% at the time believed stocks were headed lower--just as they were building steam for that 48% rebound. In the most recent survey, however, optimists are as common as green shoots (47%), and the bears have all but disappeared, at 28%.
  • An anecdote: In his newsletter to clients, market strategist Ed Yardeni recounts asking a room full of money managers whether they were more worried about being caught in a market downturn or missing a market rally. By a 10-1 margin, they were more worried about missing the rally.
  • The Early Show Indicator The CBS Early Show--our corporate TV cousin who regularly invites MoneyWatch.com's editor-at-large Jill Schlesinger on--recently declared that it was safe to open your 401(k) again. I have no reason to think that Early Show producers are better market timers than the rest of us. But I do believe they understand what their viewers are thinking, and their viewers are ready to buy stocks again.
Which is probably a pretty good reason to be leary about stocks yourself. As Allan Roth points out, the time to have been confident was in early March when almost nobody was (I sure wasn't). Now--with a 48% rally already in the books, money managers panicky about being left behind, and individual investors of all stripes ready to get back in the market--is not.

So what should you do if you missed the rally? The best advice I've heard is what investment manager Jeremy Grantham calls Plan B. (Plan A, by the way, was "Investing When Terrified" in March--so easy to see in retrospect, so hard to do at the time.) Plan B is: Admit that you probably missed the rally and start feeding money gradually into stocks over the next several quarters, with an eye towards building back towards a suitable long-term allocation. In his column, Conrad de Aenlle points out that Grantham is already on to Plan C (favor high-quality stocks over low-quality stocks) but that's cutting it a bit fine.

If you're still hiding out in the money market funds you raised during the crash, it's less important what kinds of stocks you buy than that you return to a reasonable, post-panic strategy. You should focus now on what will get you on track for the next five years or more. As you can now see, it's no good staying in cash to avoid the panic of 2008. It's over. It's also no good taking on extra risk to try to catch up with the 2009 rally. That's probably over too. Time for Plan B.

More on CBSMoneyWatch.com:

Waiting For a Signal to Get Back in the Market May Mean Missing Out
Recent Bullish Stock Market Predictions--Too Late As Usual
Five Lessons We've Learned from the Recession