Those individual investors who left the stock market in 2008 aren't back yet--which will make any near-term dip short and shallow

09/30/2009 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The Standard & Poor's 500 stock index is up close to 60% from the March 2009 bottom. Most investors, according to data on mutual fund money flows, have stayed the course so while they were pummeled by dropping prices in 2008, they've also profited from the rally of 2009.

 While investors pulled a net $174billion from stock funds in 2008, according to Morningstar, that's a drop in the bucket compared to the $4.51 trillion in stock mutual funds at the end of August, according to the Investment Company Institute.

Still not much of that $174 billion that left stock funds in 2008 has come back in 2009. In the first eight months of the year, investors put a net $209 billion into bond mutual funds, but just $15 billion into stock funds.

Nothing terribly surprising in that. One of the reasons that bear markets are so devastating to some portfolios is that the same people who piled in at the top, sell at the bottoms, and then don't get back in until stocks have strongly rallied off the bottom.

And this market hasn't made it easy to get  back into stocks. The rally has moved so quickly that it left lots of money on the sidelines and the economic data has been so ambiguous that it's hard to feel very confident that the recession is over and it's safe to jump in now after a 60% gain.

I've been wrestling with this in the Jubak's Picks portfolio for months. I've still got 30% in cash in that portfolio because I've never been totally convinced by this rally. But that means I've been 70% invested so that I have profited from the move. For me that combination of cash and stocks was a decent compromise method for handling fear and uncertainty.

The question, of course, is Wat to do now? If I can judge from my own internal arguments, a lot of the money that left the market in 2008 and that is still out of stocks is just waiting for the next dip to buy in. That suggests that the next dip won't be severe or long-lasting. To catch it you'll have to move fast.

If the dip is going to be shallow and short, it hardly seems worth waiting for it. Timing it will be very difficult and catching it just right still might mean nothing more than buying at a 7% discount.

Besides it''s not the short-term problems in this economy and this stock market that worry me. I think we are likely to see a gradual improvement in the economy in 2010 that's strong enough to support at least a modest increase in stock prices from current levels.

It's 2011 that gives me the heeby-jeebies. I'm not convinced that the recovery that we will see in 2010 will be strong enough to survive the withdrawal of fiscal and monetary stimulus in 2011.

That's left me with my current strategy for Jubak's Picks of putting some money back to work in stocks--my cash position is down to roughly 30% now from 40% this summer--if I can find shares and sectors trading at reasonable prices with good prospects for growth in 2010.

I think the bulk of the easy gains in this rally have been collected but there are still modest profits over the next 12 months for the disciplined.

But I don't want to get too enthusiastic, overpay, and take my eye off the dangers that loom in 2011.

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