“How to Get Back Into Stocks Without Getting Burned” was the name of the article that landed in my email inbox.  It was from the Director of Personal Finance for a financial information website.  But, like a lot of advice that we see in our inbox, on television and other forms of media…you usually get what you pay for.

The article starts out harmlessly enough.  It discusses a problem that a lot of investors are facing right now, the decision on when to get back into the market.  When the market got dicey a couple of years ago (dicey might be the understatement of the year), a lot of investors sought relief by pulling out of stocks.  But after a big year last year, and a pretty good year so far in 2010, a lot of those same people are trying to decide if it’s safe to get back in.  And, as the article points out, those who do jump out when things get shaky often wish they had originally made no change at all.  They are reacting emotionally.  Fear drove them out.  Now greed is calling them back in. 

The equity markets started misbehaving in the fall of 2008.  They hit bottom on March 9, 2009.  A lot of people moved to the sidelines as the viability of our financial system was in question.  Let’s say that an investor was unlucky enough to have made the decision to get out on March 9^th when the SP500 closed at 676.   After a selloff last week, the index closed at 1199.   That’s a gain of 77% our unlucky investor missed.  So now what to do?

The author’s first piece of advice is good… you shouldn’t try to time the market.  Instead, you should find the stock/bond mix that suits your situation and only make modest changes to rebalance when the market changes that mix.  She should have stopped there.  She goes on to suggest a plan to dollar cost average your way back into the market.  This allows you to tiptoe back in over a period of time by moving a small percentage back into the markets every month.  Dollar-cost averaging is how most people build an account such as their 401k over the years and it helps to smooth out your purchase prices over time and reduce the risk that you go “all in” near a market high.  She suggests spreading your purchases out over 6 months to a year or so, depending upon how much of your portfolio you moved out in the first place.    She even suggests setting up an automatic investment plan so that you don’t “chicken out” with future purchases if the market gets rocky again.  So, for an investor that moved out of the markets, I would agree with the author…up to now.

But then the advice takes a dangerous turn.  Citing her company’s equity analysts, she suggests that stocks are currently trading close to the analysts’ opinion of their fair value.  She then moves away from her earlier “don’t time the market” advice and suggests that the investor use her firm’s “Premium Stock Screener” to find the market segments that are still undervalued.  She even states that by narrowing the universe to this group of stocks that “it’s an ideal time to upgrade the quality of your stock holdings and to do so at an advantageous price.  Isn’t that timing the market?

So what is the lesson here?  I would suggest that you follow the initial piece of advice and stop there.  Build a portfolio that is appropriate for your situation in life and stop playing the guessing games.  If identifying the stocks that are currently undervalued is as easy as using their stock screener, would they still be undervalued?  And don’t forget to get fully diversified.  Your mix should include many different asset classes, not just US stocks and bonds.  You should have some exposure to international and emerging markets, real estate, commodities and a variety of fixed-income assets.  And then, as tough as it can be at times, and it can be very tough, don’t give in to the emotions of the moment by changing  your allocation.  If you do, then at some time in the future you will be struggling with the question on when, and how, to change it back.