By Don Kuehn

If you lost your nerve over the past two years and cashed out of your investments when the markets were plunging, you're not alone.

In October 2007, the Dow Jones Industrial Average was just shy of 14,000. By March 2009, it had fallen more than 50 percent to 6,627. Seeing no end to the drastic sell-off, many people dumped shares while they still had shares worth selling. Then, in the next five months the average had regained its momentum and recovered to more than 9300.

The Dow is a widely quoted index of the largest U.S. companies representing a cross-section of domestic industry. It includes companies like GE, McDonald's, AT&T, 3M and Home Depot. While not representative of the total economy, it is the most often mentioned index for the economy.

A more representative benchmark is the S&P 500 Index. It is a weighted index of some of the most actively traded common stocks covering approximately 75 percent of the U.S. market. There are many mutual funds built on replicating the S&P 500 index.

During the roller-coaster ride that was 2007 to 2009, almost all sectors of the economy here, and around the world, took a beating. As factors like the housing crisis and credit market contraction delivered a world-class beat-down to the portfolios and 401(k) and 403(b) accounts of just about everyone, many people sold shares. That made the decline even worse.

Longtime investors know that the only way these "losses" become real is if they sell securities at their then-depressed prices. In the parlance of the trade, that's turning a "paper loss" into a "realized loss" (or gain). And remembering that the goal is to buy low and sell high, dumping stock holdings when the market has fallen usually results in just the opposite: selling low.

Unfortunately when you see your net worth dropping like a stone, you realize that it's hard to be analytical and patient. So, in the face of lower prices, many of us took the chance that saving some gains accumulated over the years when the markets were soaring was a better choice than risking retirement or college or the housing fund to be heroic in the face of further paper losses.

So now, is it time to get back into the markets? Well, a good case can be made that market timing is a fool's game. Trying to guess when the market is going to go up or down leaves you with your hands in your pockets holding on to cash when you should be in, and in when you should be out.

If you were really prescient you’d have gone 'all-in' at the bottom in March 2009. But few normal people had the courage to do so.

Witness the past few months. If you had sold your entire investment portfolio back in late 2007 or early 2008, you would have missed out on the recovery that started in March … suffering the losses and not benefiting from the gains.

What are the alternatives for moving forward from this point on?

• You can wait a little longer. If you are from the "once bitten, twice shy" school of investment you need to be fully convinced that the recovery is well under way before you get back in. Two problems: Prices will be higher when you are finally persuaded that it’s okay to invest again, and the money you took out of the market is probably sitting in a money market account earning almost zero interest and tempting you to buy things you might not need.
• You can plunge back in with reckless abandon based on my—or others'—guesswork about what might happen next. The obvious pitfall here is that the "experts" might just be waaaay wrong. Then you'd be right in the middle of the scenario you had tried to avoid in the first place: stuck in the stock market with no place to hide. Bailing out again will further reduce your holdings by the broker's fees added to the losses you absorb in the next downdraft in the market.
• You can employ the well-tested technique of dollar cost averaging. That means you take the money you had set aside during the crash and plan on reinvesting it in no-load mutual funds, say, over the next year. One-twelfth of the money gets reinvested like clockwork—every month no matter if the market is up or down.

You'll buy more shares of your fund when the market is down and fewer shares when it is up, but you avoid the disaster of having all of your assets fluctuate either way.

Let's say you pulled $40,000 out of the market last year and you plan to reinvest it in an S&P 500 Index fund over the next year. In November, the fund is selling at $90 per share. You'll buy just over 37 shares with the $3,333 that represents 1/12 of your stash.

In December, the fund rises to $92.50 and your monthly investment yields about 36 shares. By January the effects of the year-end distribution of capital gains and dividends reduces the share price to $84 (funds distribute all or part of the proceeds generated by the stocks in their portfolio to shareholders late in the year). You'd buy almost 40 shares that month.

So in this three-month example, you would have purchased 113 shares at an average price per share of $88.83.

If you continue your disciplined investment strategy, in a year you will have reinvested all of your $40,000 back into the market without suffering disproportionate risk of having gotten in when the market was really high or really low.

Is this a foolproof strategy? Nope. There's no way to predict how high or low the market is going to go. But there is one thing that is almost certain: If you're not in the market, you can't benefit from the recovery when it does come.

It's a technical thing, but we won't know exactly when the recession officially ends until months after the fact. Personally, I think the end is near; perhaps it already is here. If I am even close to being correct, this may be a good time to start getting your money back to work for you by investing in low cost, no-load mutual funds so that you can benefit from the recovery.

Again (say it with me …) the idea is to "buy low, sell high." If you wait until the markets have recovered, the best you can do is buy pretty high and hope it goes higher. That's no way to make money.

If you want your money to work for you, you've got to make some hard choices. When to get into the game is but one of them.

Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to dkuehn60@yahoo.com.