“If you panicked and sold, do not second-guess that response,” Mr. Edelman said. “If you do go back into the market, then the next downturn will panic you again.”
During the pandemic, shifting to an asset allocation that emphasizes bonds may make sense. Instead of a classic portfolio of, say, 60 percent stocks and 40 percent bonds, cut your exposure to 40 percent stocks or even 20 percent, Mr. Edelman suggested.
“Maintain a long-term time horizon, if you can. Become Rip Van Winkle: Wake up in 10 years, and this will all be over,” Mr. Edelman said. “But you need to have a serious conversation with yourself and your spouse to evaluate the likelihood that you can act like Rip Van Winkle. Are you highly confident that you won’t need to touch that money for financial or emotional reasons?”
Investors who have lost their nerve might consider turning to a financial adviser they can trust — one who is a fiduciary and is obligated to put your interest first. While do-it-yourself investing is easy in a bull market, it becomes much more complicated in down markets, especially for people approaching retirement or those with other reasons to start making withdrawals.
When it comes to moving from cash back to stocks, investors have two basic options: Jump back in just as fast as you jumped out, or ease back in with a dollar-cost-averaging strategy — one in which you buy stocks consistently over time.
Because stocks tend to rise more often than they fall — and because no one can accurately predict those movements — it is likely that putting all of your money into the market at once will be the most profitable option, on average, for most investors. But your timing could be off. The market could fall sharply on the day you make your investment and not rise for years. There’s no single, sure answer.
“The mathematically correct option is to invest it all today,” said Mr. Faber of Cambria Investment Management. “Markets go up over time, and you want the most amount of time to benefit from compounding. But from a sense of emotional well-being, it’s completely rational to dollar-cost-average over whatever amount of time you feel is comfortable, whether that’s three months or three years.”
These are individual decisions, he said. “The whole key is to come to some approach that lets you survive this insanity.”