We are now nine years into the current bull market, and the S&P 500 has risen over 300% from its March 2009 low.

Unfortunately, there are some investors that have been left behind. They sold their stock in 2007-2008 and never got fully back into the stock market. For example, a reader on the Bogleheads forum recently posted this question:

“I have had about $450k sitting in cash for too long and naturally have missed out on this great bull market…I know the market cannot be timed, and in the long, long run it should be up, but it still makes me very uneasy knowing we HAVE to be towards the end of this long bull market …”

What should an investor in this scenario do?

This is not an uncommon scenario

If you read enough financial forums, a lot of people like to gloat that they stood strong and did not sell during the financial crisis. But now that we’re almost ten years on from the crisis, it’s important to remember just how scary the 2008 financial crisis was to investors. Remember that even Jim Cramer was advising some investors to sell holdings that they needed in the next 5 years. There was that much fear in the market.

Over time, investors who sold out of the market began to wade back into the market. Slowly, but surely, more and more investors came back in. But some investors never came back. The scars of the stock market losses during the financial crisis can run deep.

Even those who did wade in may have jumped out as the stock market has risen. The current bull market has been interrupted by a long series of mini-scares, and predictions about how the stock market is overvalued have accompanied its rise. The stock market may well be overvalued, but that hasn’t stopped the market from rising. As a result, many investors have been on the sidelines as the stock market has continued to surge higher.

Tips for wading back into the stock market

It’s OK to jump in, even at these price levels

If you’ve been on the sidelines, it is best to invest now. Even though you’ve missed out on years of stock market gains, that doesn’t mean that the stock market won’t continue to rise in the future.

You may be waiting for a correction, but will you be able to buy when the stock market is dropping? Stock markets rarely fall without any narrative for the decline. Buying when the stock market is falling is much easier said than done. Don’t try to time the market and jump in now.

Forget your past mistakes

You need to forget that you missed out on the last eight years of gains. Focus on what you can control, which is your current allocation and your future investment returns, not how your investments have performed in the past.

Learn from your past mistakes, but do not dwell on them. Trying to make up for past mistakes (i.e., by investing too aggressively) is a recipe for compounding those mistakes.

Lump sum investing versus dollar-cost averaging

A common question among investors with a large amount of cash that is ready to be invested is whether to do lump-sum investing or dollar-cost averaging. Lump sum investing would be investing all of the money at once. A dollar-cost averaging approach would be to slowly invest the money over a period of time (e.g., monthly over the course of a year).

From a mathematical perspective, it is most beneficial to invest your money all-at-once in a lump sum. I ran a historical simulation comparing a lump-sum approach and a dollar-cost averaging approach and the lump-sum approach was better. This is because the market rises over time, and the lump-sum approach allows your money to be invested for a longer period of time.

However, for this person, I would actually advocate a dollar-cost averaging approach. This investor has been on the sidelines of the market for years, as the stock market has risen. There is some trepidation about stepping back into the market. As a result, the psychological benefits of dollar-cost averaging outweigh the costs of taking your time to invest in the market. If he invests in the market and the stock market suddenly declines, then he may reverse course and exit the market, possibly for good.

Be more conservative with your asset allocation

For someone who has chosen to sit on the sidelines for eight years, there clearly is a fear of the stock market.

In this scenario, I would invest in a more conservative asset allocation than the typical investor his age. To get a general idea of the risk tolerance of the typical investor, you might look at the asset allocation of the target-date fund based on the investor’s retirement age. This would be the most aggressive stock allocation I would take for an investor who has missed out on the recent bull market.

More typically, I would start with a conservative asset allocation, and once the investor has experienced another bear market, he or she can modulate their asset allocation based on their reaction to the bear market.

Conclusion

For an investor who has missed out on this bull market and has a lot of money on the sidelines, I would encourage them to slowly wade back into the stock market and invest. It is impossible to predict when the bull market will end, but I am confident that the expected returns of the stock market in the future will be positive.

However, the psychology of investing is critically important in this special scenario, as an investor who has missed out on years of market gains could exit the market (possibly for good) if he or she sustains losses (even if short-term) shortly after investing. For this reason, I would suggest dollar-cost averaging over lump sum investing in this scenario, as well as a more conservative asset allocation.

What do you think? If a friend missed out on the 2010s bull market, how would you approach helping them to get back into the market?

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

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