The most common advice goes somewhat as follows:
- Every month, save as much money as possible after paying down your high interest bills
- Put that money into an index fund
- Reinvest dividends
- Enjoy your retirement in 50 years
But it seems like there's no recommendations around pulling out of the market while volatility is high. For example a simple rule could be something like this:
- If your index fund has gone down by more than 5% from its peak, pull out into bonds
- Once the market has come back to its original peak, get back in
This would've been helpful in many historical periods:
- During the dotcom bust the market has been going down from 2000 to 2003. Pulling out and waiting would've helped you avoid the lost decade
- During the 2007 stock market crash you would've likewise avoided piling money into a falling market
- During the COVID crash you would've pulled out around March 1st and avoided investing during the most volatile month in 20 years
In all three cases the market eventually recovered but... what if it doesn't eventually, similar to how Nikkei took 30 years to go back to its 1991 peak? Are there any downsides to the "pull out to be safe" strategy that I'm not seeing?
A more advanced strategy would be to buy the dip but this is getting dangerously close to trying to time the market rather than simply avoiding catastrophic loss.