To bail or not to bail? That is the question with the markets

The Orlando Sentinel (MCT) - Even with its strong rally last week, the stock market's steady drop this year has prompted more investors to fold up their tents and walk away.

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Financial advisers call it "capitulation," and some are finding it hard to argue with such a move, especially when clients are literally losing sleep over their portfolios.

"There are a lot of clients who have just thrown up their hands in frustration as they've gotten out of the market," said Roger Johnson, a financial planner with Certified Financial Group in Longwood, Fla.

Even though many investors have reaped some peace of mind by dumping their stocks, there are risks in their so-called "flight to safety" to money markets, Treasury bills and savings accounts, experts say.

Getting out of the market now could be exactly the right move for people nearest to retirement. In fact, they already should have been shifting their money to a more conservative mix before all of this happened.

But for people still at least five to 10 years away from retirement, the 379-point rally in the Dow on March 10 revealed the kind of risk they could face _ namely, missing big returns as the market recovers.

Although rallies may be temporary, they offer people a chance to recover some of their losses, said Al Baker, a financial planner and chief investment officer for The Resource Group in Winter Park, Fla.

"We really think the worst is over, and the market is ready for a nice ride on the up side," he said. "That's not to say we've necessarily hit absolute bottom yet. But for now, the elements are in place for a good bear rally, and if you want to get 10 percent to 15 percent of your money back, we say take advantage of it."

Whether you're trying to catch temporary rallies or ride the "big one," the question is how to know the right time to get back in. And apart from professional investors or daredevil day traders, most people don't have the stomach for such bets.

Long-term investors should still avoid trying to time the market, planners say. Those who were savvy or lucky enough to pull out their money before last fall's market meltdown should move back in "judiciously and gradually," using the same dollar-cost-averaging approach that has worked effectively in the past, they say.

"If there's anything we've learned from this, it is that many investors felt they could handle more risk than they really could," said Leslie Kelly, president of American Financial Advisors Inc. in Orlando. "We're advising most clients now to have an asset allocation of 50 percent stocks and 50 percent short-term bonds. And if that seems to be more risk than they want, we'll ratchet down the exposure to stocks even more."

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Some investors on the sidelines worry that the United States may be entering an era similar to Japan's "Lost Decade" of the 1990s, in which the stock market stagnated along with the rest of the Japanese economy. With the U.S. recession deepening, it's tough to dismiss the notion, some financial planners say.

"There is a very real possibility that we could have a version of the 'dead decade' because of the fear generated by this meltdown," said Orlando financial planner Paul Auslander. But investors should beware of overreacting, he said. If the economy regains its footing early next year, as many predict, investors who abandon stocks now could do serious damage to future returns.

The buy-and-hold approach to investments has taken a beating in this market.

Yet some experts argue that stay-the-course investors who have ridden the market down may still recoup their losses, but mostly by investing new money at current bargain lows and scoring big profits in the rebound.

History is on their side if they tap the right investments, said financial planner Dan Caplinger in a recent commentary for The Motley Fool Stock Advisory Service. He cited figures showing the dramatic recovery in a number of major U.S. stocks after the big hits they took in the 1973-74 bear market.

Disney, for example, lost 82.2 percent of its value during that time but had gained 4,621 percent by January 2005, he calculated. Another example: Coca-Cola lost 62.8 percent, versus a gain of 9,350 percent by January 2005.

"As attractive as the case for dumping everything now may seem, it's not the right move," Caplinger wrote. "These stocks may again prove to be tomorrow's leaders or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish."

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© 2009, The Orlando Sentinel (Fla.).