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Ready for risk, small investors cautiously return

Getting comfortable with the stock market again isn't easy for investors who had their nest eggs cracked in the past year.
Stocks Wading Back In
Donnie Griffin, of Palm Springs, Calif., poses for a photo outside of a Fidelity Brokerage Services office while visiting Seattle on business. Griffin typifies many investors who are cautiously returning to the stock market after seeing some positive signs this spring.Ted S. Warren / AP
/ Source: The Associated Press

Getting comfortable with the stock market again isn't easy for investors who had their nest eggs cracked in the past year.

Some who nervously sold stocks or otherwise avoided the market were lured back by the two-month rally that carried the Standard & Poor's 500 index 37 percent higher. But there's a lingering wariness because of the pain inflicted by last fall's meltdown, keeping many from either returning or simply increasing their stock allocations.

Typifying the mood among many individual investors, Dallas financial planner Chanc Woods senses among his clients a mixture of relief at the gains since March and reluctance to fully commit to the market.

"People have been on an emotional roller coaster over the last two years, so they're not quite ready to say 'I'm all in,'" Woods said. "It's going to take some time for them to recover, and a lot less market volatility than we've seen."

Some of those investors are ready to move money back in because of the paltry return on cash investments, which will quickly get outpaced by inflation. Rates for money-market and savings accounts currently average under 1.5 percent nationwide, according to

But jumping back in can be daunting when you've been badly burned.

Donnie Griffin, a 56-year-old management consultant from Palm Springs, Calif., reinvested cautiously in the market this month after learning a costly lesson about being out of the market at the wrong time.

Hoping to preserve what he could of his fast-dwindling portfolio as it sank toward $250,000, a "stressed" Griffin sold a significant chunk of his stock holdings on March 2 after hanging tough through months of decline. Exactly one week later began the biggest two-month rally since the summer of 1933.

Griffin insists he doesn't second-guess himself for the unfortunate timing, having made a calculated decision on how low he could allow his portfolio to go. It helps that his wife, Ross, did not bail out of stocks.

But after buying back in, encouraged by economic indicators and growing signs of financial stability, he doesn't plan to look at his portfolio for about six months. He'll leave that to his financial planner.

"Once you make a decision I think you've got to just ride it out," he said, having now doubled his stock-market exposure to 40 percent. "Having experienced this drop, I'm better experienced for the next time one comes around."

The difficulty for the investor who's scared of losing money is there are no guarantees there won't be another market slide soon.

"It's a gamble to hold and not sell now, and it's a gamble to go all-in," said Robert Haley, Griffin's planner, of Advanced Wealth Management in Portland, Ore.

The way to reduce the gamble, he said, is to build a long-term portfolio with the proper mixture of stocks and bonds that you can live with even if the Dow falls to 6,000. That would be about a 30 percent drop from recent highs in the mid-8000s.

Money manager Ben Inker says that while the market is no longer a steal after the spring rally, it remains fairly priced and offers "a better deal than we have seen for a long time."

"If you spend your time trying to figure out the perfect moment to get in, you run the risk of missing out on both a nice rally and the longer-term grinding out of pretty decent returns," said Inker, head of asset allocation for Boston money-management firm GMO.

Investors needn't pour their money back into stocks overnight, he said. But they would be well-advised to put some money in every month or two in an effort to spread their risk.

That was the approach taken by Barry Maher, 61, of Helendale, Calif., starting earlier this year.

After two years of holding off on putting any more money into stock investments, he began using dollar-cost averaging to ease his way back into the market. That's a technique in which investors buy small amounts of a stock or fund at regular intervals instead of putting in a lump sum all at once, reducing risk and avoiding market-timing decisions.

Talk about good timing. Worried about the broader consequences of the housing price collapse he was witnessing in California, Maher squirreled his extra earnings away in a money-market fund and Treasury notes for two years during the entire bear market. Then he sank it back in the market just in time for the upswing.

"When we got down near the 6,000 mark (down from the Dow's peak of 14,164 in October 2007), I thought, how much lower can it go?" said Maher, a motivational speaker on business and management topics. "When everybody was running for the hills, the downside seemed to be limited. But I put it in gradually."

Now he's feeling much better about his holdings as they climb toward the $400,000 mark.

Investors who have decided to reenter the market can only hope they feel as good about their decision as the recession and its aftermath play out in the months and years ahead.